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Despite the ‘development’ plank in BJP’s Prime Minister candiate and Gujarat chief minister Narendra Modi’s electoral campaign, cement prices, a major commodity that gets used in the infrastructure sector, have not seen much upturn in Gujarat this year. For that matter, last quarter, prices in the Ahmedabad market were rather down by 10-13 per cent owing to slowdown in demand from end user industries like real estate and infrastructure.
A recent report on the cement sector from market research firm ICRA highlighted that while average wholesale cement prices have increased by 8-12 per cent in select markets like Delhi, Chandigarh in North and Mumbai in West between September to December 2013, prices have actually declined by 13 per cent in Ahmedabad during the same period.
Cement dealers, stockists as well as companies agree that prices are indeed down by 10-12 per cent owing to slow demand. Alok Sanghi, director, Sanghi Cement admitted that prices were down in the region owing to lack of demand from user industries. A senior company official informed that average price of cement during the fiscal has been around Rs 250 for a bag, and at present prices in the Ahmedabad region were hovering around Rs 290 a bag, which is down by 10-12 per cent on a year-on-year (yoy) basis.
V Srinivasan, cement analyst with Angel Broking said that average capacity utilisation of cement plants across the country is around 66 per cent at the moment, which is the lowest in the last three years.
Right ahead of the assembly elections in the state last year, the state government had announced that it would build affordable houses every year (around 25,000-40,000 houses per year) for the lower and middle income groups.
However, demand from the real estate sector has failed to pick up. A senior official of the Builders Association of India (BAI), Gujarat chapter claimed that real estate demand is down around 20 per cent in Ahmedabad region.
The ICRA report further pointed out that cement production has grown by a modest 3.7 per cent during April-December 2013 primarily due to weak demand from end-user industries.
“Delays in environmental clearances for industrial and infrastructure projects and sand unavailability in some states contributed to slow growth. Contrary to expectations, cement demand failed to pick up even in the post monsoon season due to continuing weak demand from infrastructure and real estate sector. . In fact, as against year-til-date (YTD) growth of 3.7 per cent the production registered an even lower growth of 2.0 per cent during Q3 FY14 despite a low base (cement production had grown by 5.5 per cent in the corresponding period last year),” the report elaborated.
Lower demand has, in turn, affected the margins of cement companies. Companies had raised prices in September 2013 in anticipation of recovery in demand post monsoons, however, the price rise had to be rolled back in October due to weak demand.
At the same time, input costs have risen.The Sanghi Cement official pointed out that rising diesel prices have indeed impacted freight costs for cement companies. Cement being a bulky commodity, freight costs constitute almost 30 per cent of overall operating variable costs. Srinivasan said, “While overall input costs have risen by Rs 100-150 per tonne, freight costs have gone up by Rs 40-50 per tonne.”
The total operating income for companies in ICRA Sample (includes ACC Limited, Ambuja Cements Limited, JK Cement Limited, JK Lakshmi Cement Limited, OCL India Limited, Prism Cement Limited, Shree Cement Limited, The India Cements Limited, The Ramco Cements Limited and Ultratech cement Limited) declined by 2.4 per cent yoy in Q3 FY14.
"The operating profitability margins for ICRA sample declined from 17.1 per cent in Q3 FY13 to 14.6 per cent in Q3 FY14. Muted demand, pricing pressures and cost headwinds resulted in muted performance of cement companies in nine months FY14. Companies in ICRA Sample reported 3 per cent yoy decline in revenues in nine months FY14. The operating profitability also declined from 21.8 per cent in nine months FY13 to 15.4 per cent in nine months FY14," the report claimed.
