Most large cement firms will announce September quarter earnings this week. Anticipating good performance, stocks of most cement firms have been scaling new highs in the last few days.
Besides, as the monsoon subsided, pan-India cement prices have inched up since September, indicating some resilience. According to dealers, while the average cement price would be more or less flat during the quarter compared with the June quarter, it was 15-17% higher from the year-ago period. This should compensate for the sluggish seasonal dip in demand during the quarter that impacted despatches.
However, the Street is expecting stellar growth in net profit, mainly on margin expansion, in spite of higher freight costs. In its preview report on cement firms, Brics Securities Ltd said most companies will benefit from the 10% drop in landed price of coal, which will offset the domestic shortage, too.
In fact, operating margin is expected to expand by around 6-8 percentage points year-on-year (y-o-y) in some cases. Analysts point to Ambuja Cements Ltd and UltraTech Cement Ltd as companies that may show the biggest margin expansion. But the margins may be lower than the preceding quarter due to poorer sales volume and cement prices.
Interestingly, most analysts have bet that the second half of the fiscal year will be brighter and they expect fiscal 2013 to clock a 7-8% expansion in demand. But with new capacity coming on stream, cement firms will be able to operate only at three-fourths their installed capacity in the year to March.
Also, regional disparities are expected to continue. The second half may be good for most pan-Indian firms, but the southern companies’ fortunes are linked to monsoon that sets in November-December.
Meanwhile, from an investor standpoint, shares of cement firms are trading at a steep premium (25-40%) to their enterprise value per tonne. The mid-sized firms may be available at lower valuations, but they are more vulnerable to the vagaries of the cement cycle, price fluctuations and cost pressures. One exception is Shree Cement Ltd, which is expected to post a strong performance during the quarter.
Investors must watch for developments on the order by the Competition Commission of India, which imposed penalties of over Rs.6,000 crore on some 11 companies for cartelization to hold up cement prices. For now, there is temporary respite on this front, as the Competition Appellate Tribunal, approached by cement firms, has asked for further details on production, pricing and sales.