Cement companies likely to report weak profits in Q1

A muted macro, early monsoon arrival and a relatively high base led to subdued cement volumes across the board in first quarer

Cement companies are likely to report weak profits in the first quarter ended June 30 of this fiscal as demand remains lacklustre and realisations muted, says a research report on the sector.

 

"Cement companies are likely to report weak profits in Q1, FY14 as demand remains lacklustre and realisations muted. While Q2 is likely to remain soft as well, we expect a gradual recovery in H2, FY14 (second half or October-March) underpinned by a volume revival and stronger pricing," Religare Research said in its report.

 

"We expect our cement universe to report a year-on-year drop in topline by 4% EBITDA by 29% and profit after tax by 32% for Q1, FY14.

 

"Volumes declined for most companies except those with a presence in South India. Some pick-up in cement prices in the latter half of Q1 would help minimise the fall in realisations QoQ (avg), Religare Research Analyst Mihir Jhaveri said in the report.

 

A muted macro, early monsoon arrival and a relatively high base led to subdued cement volumes across the board in Q1 - the only exception being companies operating in South India, owing to a favourable base and some pick-up in demand in the region. Companies operating in North/West India are likely to report sharper volumes declines, Jhaveri said.

 

Following a weak March, prices failed to pick up in April due to subdued demand.

 

"Despite price hikes across regions in May and steady prices in June, "we expect realisations to fall 5-6% year-on-year/flat on quarter-on-quarter basis in Q1. Dealers (except in the south) expect current prices to soften amid demand weakness and progress of the monsoons", the report said.

 

Religare said that despite weak demand, cement prices have not fallen significantly, lending support to stock prices.

 

We believe cement companies with quality balance sheets and solid corporate governance offer a good investment opportunity as well as a proxy play on infrastructure. While Q2 is expected to remain subdued as well, "we see a recovery for the cement sector in H2FY14 led by a pick-up in volume growth and improvement in realisations", Religare said.