Unless demand from the real estate sector picks up, cement companies’ sales will remain subdued.
Most cement firms have dropped prices by about Rs 2- 5 per bag over the last few days but that’s unlikely to boost demand. Managing Director of Ambuja Cements, A L Kapoor, concedes that the growth for the industry is unlikely to be more than 6-7 per cent in the current year, way below the estimated 10 per cent.
Even this, Kapoor says, would depend on how much of a stimulus the fiscal package provides. The industry is miffed at the 8 per cent hike in railway freight rates and says, profit margins, which are already sagging because of high coal prices, could drop further.
The off take by the housing sector, which accounts for nearly half the total consumption of cement in the country, is flagging and according to HM Bangur, CMD, Shree Cement, only if real estate developers start using more cement, can the industry grow faster.
Since most builders are facing a severe cash crunch it’s unlikely that too much real estate development will take place in the near future. That means cement makers will see subdued revenue growth. In the nine months to September 2008, ACC’s top line grew just 9 per cent compared with 20 per cent in CY07. Even Shree Cements, which posted a rise in sales of 35 per cent in the first half of 2007-08, may slow down in the second half.
Also, with freight rates having increased and the price of imported coal still high, operating profit margins (OPM) for cement makers are expected to remain under pressure. In the nine months to September 2008, ACC’s OPM declined by 630 basis points to 22.3 per cent while Ultratech, in the first six months of 2008-09, has seen a 470 basis point fall to 25.7 per cent.