If capacity utilisation in the cement sector during the September 2008 quarter, estimated at around 81 per cent, turns out to be correct, it would be the lowest in four years.
The CMA estimates that capacity utilisation was at 77 per cent in August 2008 compared with 88 per cent in the same month a year ago. Industry watchers ascribe this to slowing demand from the housing sector, which consumes approximately half the cement produced in the country. What's worrying is that demand could come off further as real estate companies go slow on projects.
Companies such as ACC, Ultratech, Grasim and Shree Cement actually produced less in August 2008 possibly because they anticipated excess supply. The country, however, consumed more –sales were up 3.9 per cent –though this was the lowest rise since September 2006. Business was brisk in the southern and western parts of the country with despatches growing at 10 and 7 per cent y-o-y respectively. So India Cements and Madras Cements should both have sold better volumes in the September 2008 quarter.
Revenues for Ambuja Cement and Grasim too should be higher by about 10-12 per cent and 5-6 per cent y-o-y respectively. However, operating profit margins are likely to be under pressure as prices of imported coal remain high. Coal is priced at $200 currently, lower than its peak of $215 but higher than $140 in July 2008.
The higher energy bill and freight costs will also hurt profitability. That would make it a double whammy for players catering for the northern and eastern regions where despatches were lower by about 9 and 6 per cent respectively. Shree Cements is believed to have seen muted sales in the September quarter.
According to industry watchers, demand is coming off slowly but could lag supply which is expected to increase by 20-22 per cent compounded annually over FY08-11. An additional 11 million tonnes of cement is slated to be commissioned in the December 2008 quarter. Cement prices have been fairly stable and have risen in the southern and western regions by about Rs 3-5 per bag in August.
Analysts believe that consumption could increase in the north with construction picking up for the 2010 Commonwealth Games. But with new capacity coming in, it’s unlikely prices will sustain. At the current price of Rs 496 the Shree Cement stock trades at 4.5 times its estimated FY09 earnings while Ambuja at Rs 73 trades at 9 times its forward. ACC at Rs 598 is at a shade over 10 times its estimated CY08 estimates, whereas, India Cement trades at 4 times forwards.
