Q1 likely to be disappointing for cement companies

The impact of weak demand and realisations was visible in the performance of cement companies in the quarter ended March. While UltraTech, one of the leading cement companies, saw its sales volumes fall 3.3 per cent to 11.4 million tonnes (mt), the sales volume of ACC declined 4.5 per cent to 6.4 mt, compared to the year-ago period. Ambuja Cements saw its total sales volumes (cement & clinker) decline 3.6 per cent year-on-year to 6 mt.

Freight costs increased due to diesel price rises, as well as railway freight increases, hitting profitability. However, lower fuel costs, especially that of imported coal, and higher usage of pet coal provided some respite. Nevertheless, this wasn't enough to boost earnings before interest, tax depreciation and amortisation (Ebitda) margins. Ultratech's Ebitda per tonne fell from Rs 13,191 in the March 2012 quarter to Rs 12,821 in the quarter ended March this year; ACC's Ebitda per tonne fell from Rs 920 to Rs 696, while Ambuja's declined to Rs 859 from Rs 1,204 in the quarter ended March 2012.

It is unlikely cement companies would get respite in the quarter ending June, in terms of realisations. Teena Virmani at Kotak Securities says average realisations during the June quarter are likely to be low, owing to a fall in prices from April to mid-May. Of late, however, cement prices have seen a recovery.

Religare analysts said cement prices had corrected further in April, as demand was feeble. Despite a round of price increases in May, realisations are likely to decline year-on-year in the June quarter, the first time in 8-10 quarters. Add to this last year's high base, when delayed monsoons led to an extended good run for cement companies. Analysts expect the entire first half of FY14 to be tough, with pressure on profits and continued underperformance for their share prices.

  However, analysts expect a recovery in demand and, therefore, realisations in the second half of FY14; pre-election spending by the government would kick-start demand, they say. Also, with the monsoon expected to be normal, water scarcity woes in Maharashtra, Karnataka, etc, are likely to be resolved, leading to a rise in construction activities.

Ravi Sodah at Elara Capital expects cement demand to improve in the second half of FY14, due to pre-election spending by the Centre. He says the softening prices of petcoke and coal are likely to reduce cost pressures for the industry. He believes the recent price corrections provide an opportunity for long-term investors.

At their current prices of Rs 1,237, Rs 184, and Rs 1,975, ACC, Ambuja Cements and UltraTech are trading at an enterprise value per tonne of $123, $170 and $159, respectively, according to FY14 estimates.