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Business News/ Market / Mark-to-market/  Cement companies may remain on shaky ground in 2014
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Cement companies may remain on shaky ground in 2014

Analysts expect cement sales growth to improve only marginally to 6.5% next year compared to 4-5% in the current fiscal year

The shares of cement companies have underperformed the market year to date with stock prices of top ten players down 6-50%. Photo: Priyanka Parashar/MintPremium
The shares of cement companies have underperformed the market year to date with stock prices of top ten players down 6-50%. Photo: Priyanka Parashar/Mint

The outlook for cement firms, as with most other industries, hinges upon an economic recovery. Sales in 2014 are expected to remain under pressure on the back of slower government spending as fiscal deficit concerns mount, and a slow recovery in the capital expenditure cycle by private firms. At the same time, higher costs may continue to weigh on the profitability of cement makers in the coming year.

Analysts expect cement sales growth to improve only marginally to 6.5% next year compared to 4-5% in the current fiscal year. What is worrying is that cement demand may not pick up ahead of the general election due in May . Pre-election infrastructure spend may be constrained because the government is walking a tightrope, trying to curb the fiscal deficit to hold off threats of a rating downgrade even while growth is sluggish. Uncertainty about the new government is also making companies defer their investment plans.

Secondly, given the slow recovery and excess capacity in the industry, prices may remain soft in the first half of the next year, say analysts. Average capacity utilization levels are expected to drop from a decadal low of around 70% in FY13 to 68% in FY15 due to capacity additions. All India capacity is expected to rise marginally to around 375 million tonnes (mt) next fiscal year from 350 mt this year, according to Barclays Research. Prices will also remain under check because of new entrants such as ABG Cement, Lafarge Cement, Siddhi Vinayak Cement and Reliance Cement.

The all-India average cement price for FY14 is estimated to remain nearly flat year-on-year versus an estimated increase of 1.5% in the current year. The excess capacity situation is bad enough for brokerages to downgrade their price hike estimates for financial year 2015 to 5.5% compared to 8% earlier.

These factors will weigh on profit margins even as diesel and railway freight costs continue to escalate. Note that operating profit margins for the top ten cement players were the lowest in the last three years in the September quarter.

The shares of cement companies have underperformed the market year to date with stock prices of top ten players down 6-50%. The recent run-up in share prices has made valuations slightly expensive.

Unless demand improves and companies can exhibit pricing power, earnings downgrades will put pressure on stock prices next year.

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Published: 30 Dec 2013, 09:06 PM IST
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