The finance minister in his Budget speech last Friday proposed to raise the excise duty for cement companies from the existing 10 per cent to 12 per cent, which analysts say will be passed on to consumers.
The positive move is the removal of customs duty on coal imports. Of UltraTech’s requirement, 38 per cent is met through import. Others such as Ambuja Cement would also benefit, though not as much as the Aditya Birla-owned UltraTech. “As a result, the coal cost for Ambuja and UltraTech is expected to reduce by around Rs 16/tonne and Rs 19/tonne, respectively, leading to potential earnings upside of two-three per cent,” state Edelweiss Research analysts in a recent report.
On the flip side, Coal India may resort to a price rise in April that may push up coal costs at the domestic level. UltraTech will also bear the brunt of the rise in rail freight rate, which will push up its overall costs.
Analysts say companies may resort to price rises but that would barely cover the increase in overall cost and will not add much to net profit. More, it will be difficult for companies to sustain higher prices once the monsoon season sets in around July.
In this backdrop, UltraTech, that has given a year-to-date return of 30 per cent in 2012 as compared to the 12.5 per cent rise in the Sensex, may consolidate for a while at the current levels, analysts say. However, they remain bullish on the stock from a long-term perspective.
Budget impact
The Budget proposals seek to raise the excise duty to a uniform 12 per cent now. However, analysts remain neutral on the event,as the rise in cost will be passed on to consumers in the form of price rises. Analysts at Edelweiss Securities estimate an increase of Rs 3 a 50-kg bag. As already mentioned, a major positive for manufacturers is the removal of five per cent customs duty on imported coal. At the domestic level, the advantage may be short-lived, as Coal India may again resort to a price rise in April to offset the rise in wage costs.
After increasing the busy season charge in the December 2011 quarter from seven per cent to 10 per cent and the development surcharge from two per cent to five per cent, the railways have again gone for a round of freight rate increase by 20-32 per cent, with effect from March 6. The rail freight for cement makers could increase 23 per cent as a result, say analysts at Emkay Research.
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The industry depends on the railways for transporting 45-50 per cent of total production for distances above 500 km and freight forms 22 per cent of the total cost of selling cement. Thus, the 23 per cent increase in rail freight is estimated to have pushed the freight cost for the industry by Rs 71/tonne or 10 per cent to Rs 778/tonne for 2012-13, observe analysts at Emkay. UltraTech uses the railways for 43 per cent of its freight movement, while roads account for 52 per cent. Thus, diesel price rises can also have a large impact on freight costs for UltraTech.
Given that ACC and UltraTech have the highest exposure to the railways for domestic despatches; their costs are likely to surge by Rs 60-80/tonne, respectively, say analysts at Edelweiss Research.
Outlook
Prior to the Budget, cement makers had already raised prices by Rs 10 a bag to pass on an increase in freight costs. Analysts at Edelweiss had then suggested these price rises would increase net realisation by Rs 7/bag (net of current excise and value added tax) and hurt the industry in the lean season, the second and third quarters of the coming year. They feel these price rises are unsustainable, due to the continued low capacity utilisation of 78 per cent estimated for 2012-13 verrsus the 77 per cent in 2011-12.
“Though we are entering the busy season, cement prices and demand may remain firm. However, given the sharp run up in some frontline stocks we remain selectively optimistic on some other cement stocks,” Ravindra Deshpande at Elara Capital observes.
Vineet Hetamsaria head of research at PINC Research says that from the current levels, one may not see much upside in the near term for Ultratech. Cement players need to maintain manufacturing discipline and sustain prices for one more year after which the tide will turn in their favour. The additional capacities will also come to their advantage.
A recent BRICS report suggests demand in all regions except Bangalore remains moderate. In the past 11 months of FY12 as well, demand has not seen much improvement. Ultratech's year-to-date dispatches have grown 3.2 per cent y-o-y. Going ahead, analysts see volatile prices in most regions except those in the south due to an oversupply situation continuing till end of FY14.
For the UltraTech stock, Bloomberg data shows that out of 19 analysts polled, 38 per cent have a buy rating on UltraTech, while 31 per cent each recommend a hold or a sell rating.