Cement: Hard times

Lower utilisations could put margins under pressure.

Cement firms are in for tough times.With crude prices touching new highs, they will have to pay more for freight. Moreover, with fresh capacity expected to be commissioned by the end of 2008, prices could see a correction. Freight costs account for almost 25 per cent of production costs.

Analysts estimate that around15 million tonnes of capacity will go on stream in FY09. Grasim and Ultratech should be ready to enter the market early next year.

While consump-tion in April- May this year rose 7.5 per cent y-o-y, a slowdown in the housing sector,might keep demand muted. Demand from the industrial construction market is likely to remain strong but may not absorb the excess supply. Thus, average realisations could come off by Rs 5-7 a bag.

Meanwhile, the high cost of inputs such as coal ""prices of which have risen by about 15 per cent over the past year "" are hurting margins. The Rs 3,044 crore India Cements saw its operating profit margin (opm) slip 190 basis points y-o-y to 31.2 per cent.

However, the Rs 2,011 crore Madras Cement did better with margins up slightly at 31 per cent. The Rs 7,067 crore ACC's March 2008 quarter numbers too were a tad below expectations. While the numbers are not strictly comparable, ACC's opm fell 410 basis points to 26.2 per cent ,even as net sales rose just over 7 per cent to Rs 1,796 crore.

Cement valuations are not demanding given the sharp correction in share prices. For instance at Rs 75, Ambuja Cements trades at just over 9 times estimated CY08 earnings while Mad-ras Cements at Rs 2,756, trades at 9 times estimated FY09 earnings. At Rs 131, India Cements commands a multiple of 5.5 times estimated FY09 earnings.