Higher sales no silver lining for cement sector

Higher sales no silver lining for cement sector

Brokerages estimate that December cement dispatches increased 3-5% over a year ago. This after a tepid November, when sales fell 6%. Unfortunately, that’s where the good news ends.

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The outlook for the sector is scarred by slow-moving demand and excessive supply. A Fitch Ratings report released on Thursday forecasts local cement demand to grow 10% this year while supply will likely gain 12% as firms build more factories. Consequently, cement makers suffer from a crippling lack of pricing power that is unlikely to go away for some time yet.

The Fitch report confirmed the worst fears of investors and scrips of larger cement makers tanked. ACC Ltd shed 4.25% while Ambuja Cements Ltd declined 5.15% and UltraTech Cement Ltd lost 5.75% in value.

This is a change from about a month ago. Till December, investors had seemed to shrug aside fundamentals. Then many cement stocks had outperformed the Sensex over the past three months as investors perceived the cement cycle to have bottomed out. But since then, most have lagged the Sensex as stock prices caught up with the fact that cement makers’ realizations were declining.

Despite a 3% growth in December sales and some 7.5% increase for thequarter, demand is still below what is normally seen during that period. Even this slight pickup hasn’t helped in pricing. Prices have declined in most regions by Rs5-30 per bag, according to analysts. At the same time, raw materials and transportation costs, too, are increasing, squeezing margins.

Brokerage Prabhudas Lilladher Ltd expects sector margins to shrink by some four percentage points for the three months ended December. Analyst estimates for operating profit declines in the third quarter vary 24-33%.

The prognosis isn’t cheery either. Despite the fourth quarter traditionally being the busiest for the construction sector, sales aren’t expected to increase much. Housing loans are growing only at some 9% year to date, according to Reserve Bank data. The tight liquidity continues to affect the infrastructure sector. Cost of raw materials such as steel and sand too are increasing, crimping growth in the construction sector.

Despite demand growth projected at 10%, the pain is expected to continue till the time utilization levels improve from around 74% now. However, with two-thirds of expected capacity addition this fiscal to soon come onstream, that doesn’t appear likely for another six months.