On a shaky foundation

The landed price of imports could dent the pricing power of domestic cement manufacturers

The government's decision to do away with countervailing duty of 16 per cent and additional duty of 4 per cent on cement has only added to the woes of the already battered cement companies.

The import cut means that the landed cost of imported cement should now fall by about Rs 30 to around Rs 215 per 50 kg bag. This is much lower than the overall national average domestic retail price of around Rs 225 a bag.

In institutional markets, the import price would fall to about Rs 185 a bag now from about Rs 210-215 earlier. This will make a difference to bulk consumers to an extent, especially if they are close to a port facility.

However, there are real issues of inadequate facilities for bulk handling and warehousing at domestic ports. A typical cement shipment consists of around 25,000-30,000 tonne, while even a large consumer will not have demand for more than a tenth of that quantity.

Analysts say that cement imports will account for a tiny amount of the domestic cement demand. Transportation costs would add around Rs 25-30 per 500 km making sales of imported cement to the interiors unviable.

While imported cement may not build skylines across the country, the sentiment for the sector has taken a turn for the worse. Though cement manufacturers are unlikely to lower prices, analysts expect the landed price of imports to act as a benchmark that could severely dent the pricing power of local cement manufacturers.

They add that companies with significant exposure in the coastal areas such as India Cements, UltraTech Cement and Gujarat Ambuja will be adversely impacted.

At the bourses, UltraTech had the greatest fall among peers, falling over 5.6 per cent, partly also owing to its larger exposure to the institutional market, which has the wherewithal to import cement, and even invest in bulk handling and storage capacities if required.

Cement valuations had peaked in January, but after the removal of customs duty in January, and the introduction of graded excise duty in the Budget, analysts have downgraded the sector.

Though demand-supply mismatch till FY09 is a positive, the recent government moves to control prices have been a dampener. Even at current valuations-the top four cement scrips trade at 9-11 times their estimated FY08/CY07 earnings - analysts are negative on the sector owing to the loss of pricing power and the uncertainty surrounding future government moves.

Spicejet: Foggy outlook

Spicejet has seen revenues grow at a reasonably good 86 per cent q-o-q to Rs 246 crore in the February quarter. However, even after earning a sale and lease back income of Rs 18.66 crore, the Delhi-based low cost carrier has posted an operating loss of around Rs 45 crore and net loss of Rs 19 crore.

That's primarily because the addition to capacity has been high for the airline: it has added five aircraft over the past five months since October, taking the fleet size to 11 planes.

Passenger loads too were a subdued 77 per cent in the February quarter that had two lean months and one busy month. However, the airline has managed to keep costs in check; its cost per available seat km for the quarter was lower at Rs 2.44 y-o-y from Rs 2.65, despite fuel costs having gone up. But yields continue to remain under pressure and for the nine months ended February they were around Rs 2.11-2.12.

The airline could continue to post losses for some time. While capacity addition in the industry may slow down in the current year to 30 per cent from around 45 per cent in 2006, it could still keep loads and yields under pressure. Also while demand is growing at around 40 per cent y-o-y, it is being stimulated by low fares.

Spicejet has managed to raise Rs 297 crore through a preferential allotment of shares and so should be able to sustain losses for some time. At the current price of Rs 43, the stock trades at 31 times estimated FY08 earnings of Rs 1.4 and given the difficult phase that the industry is passing through, it appears to be expensive.

With contributions from Venkatesh Rangan and Shobhana Subramanian