After holding out for nearly two quarters, cement prices are slowly but surely cooling off as demand slackened in the past few weeks. In fact, in spite of the strong March quarter performance of most cement firms, there were concerns on their ability to sustain high cement prices on the onset of monsoon rains. The drop has come earlier than expected.
Dealers say prices have corrected by an average 4-5% across India, with the northern region reporting the highest drop of around 7% from the year-till-date high in 2012. Prices rose only in the eastern belt, and were stable in the south.
According to analysts, a ban on sand mining in some regions led to a shortage of sand, gravel and building material. Besides, there is an acute labour shortage as workers shift from construction to harvesting.
A drop in prices in May was unexpected as this is the time of the year when companies increase prices to make up for the post-monsoon dip a month later. According to a report by Fortune Broking Ltd, high inventory levels following strong despatches in April may have put pressure on prices.
Shares of the country’s top cement producers ACC Ltd, UltraTech Cement Ltd and Ambuja Cements Ltd, which outperformed the benchmark indices in the latter part of calendar year 2011, have fallen harder than the BSE Sensex since end-March. This is because the outlook for the next two quarters will be grimmer as demand peters off during the monsoon. Also, strong prices until June would have offset the cost pressures, given the rising cost of coal, power, fuel and freight. Analysts say the 23% increase in railway freight and a 200 basis points increase in excise duty were effected only by end-March and, hence, will be mirrored in results only from the current quarter.
No doubt, the monsoon rains are a temporary, predictable phenomenon affecting the fortunes of the cement sector. But this time, higher cost pressures will take a bigger toll on profitability. A report by Crisil Research highlights that additional capacity of 25 million tonnes during fiscal 2013 (FY13) will bring down capacity utilization to 72%, from 75% in FY12 and 78% in FY11. Lower operating leverage will further drag profit margins.
In other words, the rally in cement stocks seen in the last two quarters has hit a road bump.
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