The June quarter earnings of three companies, which represent two-fifths of the country’s cement production, present a mixed bag. While UltraTech Cement Ltd’s net profit increased 22.4% from a year ago, ACC Ltd and Ambuja Cements Ltd saw a fall in profit after tax. Yet, there are some common elements that determined their results and shared outlook for the next couple of quarters.
Just like in the previous quarter, increases in the input costs are hurting cement makers. Unlike in the March quarter, when the firms took a 12-15% price hike to pass on the costs of materials such as slag, fly ash and gypsum, their hands were tied in the past few months. That, despite a 30% increase in coal prices. Indeed, a proposed mining tax could further increase the prices of coal and limestone, hurting margins even more.
Also See | Mixed Bag (PDF)
The reason why companies couldn’t increase prices of late is because demand growth is tapering off. In the June quarter, total industry dispatches rose 0.7% from a year ago, down from 4.7% in the March quarter. Ambuja and UltraTech both saw volumes declining in the June quarter, while ACC’s sales rose 11%. Note that all numbers for UltraTech include those of Samruddhi Cement Ltd, the firm it acquired last August.
Demand is likely to be beaten down further. Higher interest costs squeezing the real estate sector, political issues slowing down construction activity and the monsoon—all are hurting cement firms. What’s not helping is the surplus capacity. Motilal Oswal Securities Ltd estimates that capacity utilization declined to about 74% in the June quarter compared with 80% in the three months ended March. With many firms in the sector lining up new factories, this situation is unlikely to change for at least the next couple of years. As a result, selling prices are expected to come under further pressure.
That said, the March quarter price increases helped pump up per tonne realizations for all three firms, hence, boosting revenues. ACC’s revenue rose 17%, nearly double that of UltraTech and almost thrice the growth of Ambuja. Yet, a 26% gain in expenses, driven by power and fuel costs, led to a 2.4% decrease in operating profit. Operating margins fell 4.6 percentage points.
Ambuja suffered similarly. Expenses grew faster than net sales and its operating profit, too, fell 7.1%, while operating margins declined 3.9 percentage points.
UltraTech’s realizations rose 11.6% over a year ago, the most among the three firms. That, plus the company’s savings on freight and employee expenses, boosted operating profit 15% from a year ago. The firm’s operating margins were the best in the last six quarters at 27%, up 1.5 percentage points from a year ago. A part of this improvement could perhaps be attributed to the efficiencies the company enjoys after the merger with Samruddhi.
The stocks of all three firms have outperformed the Sensex and BSE-100 Index since the beginning of this fiscal. However, the bleak outlook—and in the case of ACC and Ambuja, their below par June quarter numbers—will mean that the outperformance may not necessarily continue.
Graphic by Sandeep Bhatnagar/Mint