BackCement: where is the recovery?
Analysts are expecting volume growth to improve only marginally to 7% in FY16 from the around 5-6% for FY15
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The story for the cement sector remains pretty bleak—demand continues to disappoint and infrastructure spending is yet to kick in.
The much-awaited demand revival is now expected in the second half of the fiscal, led by an increase in government spending on infrastructure and schemes such as “housing for all" and smart cities. How much of that translates into action on the ground remains to be seen. Analysts are expecting volume growth to improve only marginally to 7% in FY16 from the around 5-6% for FY15.
The June quarter earnings of cement companies were not very encouraging. Net sales growth for the top 10 cement firms declined 0.4% in the June quarter, after clocking flat growth in the quarter ending March.
Volume growth and realizations remained muted. Analysts expect sales growth in the three months ending September to also remain subdued because of the monsoon season. On average, all-India cement prices declined around 4.2% year-on-year, with prices in all regions except South India falling, Emkay Global Financial Services Ltd said in a note dated 21 August.
Cement prices in South India continued to rise, up 26% year-on-year despite tepid demand because of pricing discipline. As a result, earnings before interest, taxes, depreciation and amortization (Ebitda) per tonne jumped substantially for south-based firms India Cements Ltd and Ramco Cements Ltd. The demand scenario was slightly better in the eastern region due to a lower base and pre-election spending in Bihar and West Bengal trickling in.
Overall, the realizations for cement companies declined around 1.7% due to weak pricing power, which weighed on their profitability, according to Emkay Research. As a result, operating profit fell 13% in the quarter ended June and net profit plunged around 34% (year-on-year) for the top 10 cement companies, compared with a year ago, the worst in seven quarters. The top 10 cement firms by market value are ACC Ltd, Ambuja Cements Ltd, Birla Corporation Ltd, India Cements Ltd, JK Cements Ltd, JK Lakshmi Cement Ltd, Prism Cement Ltd, Shree Cement Ltd, The Ramco Cements Ltd and UltraTech Cement Ltd.
There are some green shoots though—while raw material costs as a percentage of net sales remained stable at around 17.8%, power and fuel costs were the lowest in around five years due to a decline in pet coke and coal prices. Moreover, with prices of key raw materials such as crude dropping sharply, margin recovery will be seen in the September quarter.
The large-cap companies are still trading at rich valuations after the recent correction, factoring in a sharp recovery in the second half.
Unless demand recovers, the upside for these stocks may be capped.
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