Increases in input cost have impacted operating margins of cement companies in the quarter ended March 31, down 187 basis points (bps) year-on-year despite an average price hike of Rs 30-80 a bag from the lows of the third quarter. They are lower by almost 800 bps over the hefty margin of 26.7 per cent achieved in the quarter ended June 2009.
The 15 cement companies analysed here (the results are not available for cement giant Grasim, JP Associates, Shree Cement and Madras Cement) recorded flat sales growth, while the profit rose 5.6 per cent, mostly due to the lower depreciation and taxation.
The cost of power and fuel was lower by over three per cent on account of stock adjustment. Imported coal cost rose to $110 a tonne from $90 a tonne in the third quarter.
Cost impact ahead
The impact of rising input cost was a bit slower, as cement prices in the early part of the quarter were better. Going ahead, the impact of rise in imported coal rates, 11 per cent hike in domestic coal, increase in freight cost with hike in diesel rates and removal of service tax exemption on rail freight would further play out, says cement analyst Archana Khemka of Edelweiss Research. She indicates players would need to bear the increase in excise duty, which they were able to pass on until recently.
The monsoon setting in from June and high coal cost, besides new capacities being stabilised, would not augur well for the industry in the short term.
The southern region market is expected to improve, as the infrastructure-related spending that was earlier on backburner should commence. Raw material cost increases on top of higher excise duty will limit the pricing power, which in turn will impact the margins.
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Cement prices have begun to decline across regions, dropping by Rs 5–20 a bag in April on lower demand and augmented supply. The price corrections in the north and east have been Rs 5 a bag, while the central region recorded the highest decline of Rs 15–20. In the south too, the positive streak has ended, with prices slipping by Rs 6–10 a bag, say cement analysts at Religare Research.
Varying profits
Among cement companies that declared results, UltraTech Cement’s profitability was much below expectation. Management explained that the increase was muted as the fourth quarter started on a lower base and price increases in the south happened only towards the end. Raw material cost per tonne increased on account of higher clinker purchases, increase in limestone royalty and higher cost of aggregates.
| UNDER PRESSURE Growth rate for the quarter ended (All figures in %) | ||||||||
| Quarterly growth in net sales | Quarterly growth in net profit | |||||||
| Jun-09 | Sep-09 | Dec-09 | Mar-10 | Jun-09 | Sep-09 | Dec-09 | Mar-10 | |
| ACC | 14.80 | 9.30 | 3.00 | 3.50 | 84.64 | 59.82 | 6.84 | -1.62 |
| Ambuja Cements | 18.20 | 16.20 | 6.20 | 7.80 | -43.74 | 27.34 | -3.12 | 38.36 |
| Birla Corpn. | 23.90 | 36.00 | 23.60 | 5.50 | 69.18 | 154.69 | 37.98 | 51.75 |
| Chettinad Cement | 29.20 | 28.70 | 14.00 | 7.50 | -19.29 | 30.24 | -73.76 | T’around |
| Heidelberg Cement | 67.20 | 74.40 | -32.90 | 5.30 | 86.74 | 169.15 | -75.13 | -17.60 |
| India Cements | 10.10 | 7.50 | 14.50 | 8.70 | 1.51 | 1.99 | -43.79 | -59.17 |
| Mangalam Cement | 32.00 | 18.30 | 4.20 | -11.10 | 75.66 | 58.92 | 56.55 | -40.65 |
| UltraTech Cem. | 30.50 | 10.40 | 1.30 | 2.60 | 57.64 | 52.81 | -17.76 | -26.15 |
| Average for 15 firms | 18.39 | 5.67 | -2.07 | 0.76 | 20.91 | 42.26 | 1.32 | 5.57 |
Ambuja Cement reported revenue growth of 7.7 per cent on the back of 3.2 per cent rise in realisation and 4.4 per cent volume growth. The operating margin on cement sales were more or less unchanged, year on year, but were higher by over 500 bps, quarter on quarter, due to lower clinker purchase, saving in power & fuel costs tight control on variable cost. The installation of new clinker capacity resulted in lower purchase from the market. Net profit was up 38.3 per cent, primarily due to better operating performance and extraordinary income.
ACC reported a marginal growth in sales on higher realisation, largely due to price hikes carried out post the Union Budget. The operating margins on core business slipped over 280 bps on higher input cost but rose sharply over 700 bps, quarter on quarter, due to higher realisation. Net profit remained more or less flat on higher depreciation, but a lower cost of borrowing.