BackCement firms on shaky ground
Ambuja's net profit fell 45.4% from a year ago and ACC's consolidated net profit declined 51%
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Investors had low expectations of cement company numbers in a traditionally weak September quarter when the rainfall stops construction activity. Thus, the main interest in the numbers of ACC Ltd and Ambuja Cements Ltd was in whether they would meet even these modest forecasts.
They did not.
Ambuja’s net profit fell 45.4% from a year ago and ACC’s consolidated net profit (after it merged some ready mix concrete units with itself) declined 51%.
Weak demand meant that prices were depressed early in the quarter and the rise in September wasn’t enough. When combined with small increases in volumes, it meant that realizations fell. ACC’s cement realizations slipped 4.9% while Ambuja’s fall was sharper at 9.2%.
Secondly, the rise in some costs outpaced the sales increase, for example, freight expenses. For Ambuja, these expenses as a proportion of sales increased by 2.9 percentage points. As far as power and fuel and raw material expenses go, both companies have done well to keep these under check and the rupee depreciation seems not to have made that much of an impact.
It must also be noted that a good part of the rise in total expenses was because both companies gained massively from changes in inventory in the year-ago quarter. These inventory gains make expenses in the just-ended three months comparatively bloated.
Still the fact remains that operating margins of the companies fell massively—by as much as 10.7 percentage points in the case of Ambuja—underlining the weakness in the sector.
Prices have increased in recent weeks, but that is more a reflection of firms’ desire to prop up margins rather than increasing demand. The forthcoming elections and a good monsoon, which is likely to boost rural construction activity, are positive indicators for cement companies. But a revival in the capex cycle and government awards is yet to be seen. Moreover, according to Motilal Oswal estimates, industry capacity utilization has declined three percentage points from a year ago to 66%, the lowest in 13 years. Unless demand improves significantly, that will keep stock prices under check.
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