Analysis: India Cement- Poor realizations and higher costs take the toll

The trend set by most cement players in the current result season for September’12 quarter (reporting robust double digit growth in revenues and profits) was finally broken by India cement.

During the September quarter top line at Rs 1,122.67 crore grew marginally by 3.1%. EBIDTA margins declined to 18.48% from 23.34% in September’11 quarter and profits at Rs 49.08 crore declined 29.6% y-o-y.

The dismal performance was on the back of poor demand and realizations seen in Southern part of India. Whereas average realization across the country improved by Rs 5 a bag in the June’12 quarter during September quarter. South India saw average prices at Rs 302 a bag a tag lower than Rs 303 seen in the June quarter.

While average quarterly price may not indicate the gravity of the challenges faced by the industry in South, fact remains that Andhra Pradesh saw per bag prices plummeting by as much as Rs 45 a bag in the month of September.

Andhra Pradesh is the largest market in the South, with adequate capacities, which has been worst hit amongst all South Indian states. The Telangana Issue has taken its toll on retail demand and government spending also remaining affected leading to the cement demand and realizations taking a beating.

The profitability has also taken a hit due to the power problems in Andhra Pradesh. Various players have had to take power from central grid at higher rates. Also with freight costs increasing due to diesel price hikes and Railway freight hikes, the margins have further been hit.  The Poor realizations on the other hand were unable to provide any cushion. In the backdrop the performance by India cement has been dismal.

Thus while most cement players having exposure to other regions of the country riding on strong realizations and demand have continued to give strong returns and hit 52 week highs in the month of October’12 the same has not been applicable to South India based players as India cement.

Moving forward the situation does not look to good in the interim. While prices have recovered in Andhra-Pradesh, Tamil Nadu and Karnataka have seen some price correction. The demand scenario is still not giving a clear trend though optimism continues for days to come. As per V Srinivasan at Angel broking, Tamil Nadu is seeing a spurt in demand. The impact on the realizations however still remains to be seen.

For India cement the ray of hope strengthens from the fact that the coal Supplies from Indonesia are likely to start in March quarter. This will help reduce raw material and power costs for India cement. Analysts at Motilal Oswal observe that Going forward we expect power cost to reduce with shipment starting from Indonesian coal mines likely by Jan – Mar quarter. In the backdrop, they maintain buy ratings on the stock largely due to inexpensive valuations.