UltraTech net profit falls

Cement firms expected to slash capex

Indian cement companies are planning to slash their capital expenditure over the next 12 months, reflecting excess capacity and a slower-than-expected revival in homebuilding and construction in Asia's third-largest economy.

Two-thirds of demand for cement in India, the world's second-largest producer after China, comes from residential developers who have significantly slowed the launch of new projects as high inflation and interest rates and an uncertain economic outlook combine to deter homebuying.

India's biggest cement maker UltraTech Cement on Monday announced a 16.3 percent year-on-year fall in quarterly profit, which it ascribed to an increase in railway freight costs and diesel prices.

UltraTech was not immediately available for comment on its expansion plans, but the company said in a statement that it intends to spend Rs 2,000 crore to expand a plant in Rajasthan.

UltraTech expects long term demand for cement to grow by 8 percent driven by housing demand and infrastructure development, it said.

Century Textiles declined to comment, while Grasim Industries, Madras Cement and India Cements could not be immediately reached for comment.

"People are not pushing the pedal on expansion right now," said Nitin Bhasin, sector analyst at domestic brokerage Ambit.

"Overcapacity has become way too high for the industry to handle and the GDP deceleration has caught housebuilders who are feeling the pain of inflation and poor visibility of income growth which is holding them back," he said.

Excess capacity

A recent downturn has dragged economic growth to a decade-low of around 5 percent, and though Prime Minister Manmohan Singh launched a series of reforms late last year, confidence is relatively low among employers and consumers.

Many cement firms planned their capital expenditure programmes five years ago, at the height of the construction boom in India, when they reckoned double-digit economic growth would continue for many years. Since then more than 100 million tonnes of capacity, or more than 50 percent, has been added, with 30 million tonnes added in 2012-2013 alone, say analysts.

Capacity utilisation at cement plants in India fell to 71 percent in fiscal year 2012-2013 from 89 percent in 2009-2010, and is expected to be just 75 percent in 2014-2015, according to India Ratings & Research, a part of global ratings agency Fitch.

Ambit's Bhasin expects 20 to 25 million tonnes of new capacity to be added over the next 12 months as projects planned two to three years ago are completed but no new expansion plans have been announced over the last six to nine months.

Cement companies had expected demand to grow by about 8 percent during fiscal year 2012-2013, they said before the year started, but analysts reckon the sector grew by just 5 to 6 percent over the period.

"There is a mismatch in demand and supply," said Rashesh Shah, analyst at ICICI Securities. "There has been huge capacity expansion by companies in the last two to three years and demand has slowed over the last few months because the government is not spending on infrastructure projects and house building has also slowed," he said.