Earnings of large companies may jump in Q3 on higher realisations.
November has turned out to be a good month for cement companies. The sector, hit by slowing demand and cost pressures, has undertaken several price rises over the last few months and has also seen a revival in demand. At 17.5 million tonnes (mt), demand for cement in November is up 20 per cent annually. According to Deutsche Bank, the main reason behind this uptick is a marginal pick-up in road projects and steady demand in some regions. As a result, industry’s utilisation levels have jumped to 82 per cent in November. Going forward, fresh capacity addition (31 mt per annum to be added over FY12-13) will not affect pricing adversely.
Cement demand growth mirrors the country’s GDP growth. However, in the first half of the current financial year, demand grew at 3.1 per cent. Due to relatively weaker demand in the first quarter, the sector is expected to see demand grow at five per cent in FY12, against the estimated seven per cent. Analysts expect demand to remain sluggish till FY13.
Analysts claim the pick-up in demand in recent months, has also helped companies undertake price increases. Average retail prices of cement increased about three per cent month-on-month to Rs 289 per bag, and by almost 17 per cent year-on-year, according to Crisil Research. “Cement demand will continue to gain traction during the remainder of 2011-12. However, in light of the steep rise in prices over the past nine months, the tempo of price increase is likely to slow. We expect prices to stay at current levels in December,” explains Ajay D’Souza, head, Crisil Research.
Given that realisations are up, Deutsche Bank expects large-cap cement companies to report a 14-60 per cent jump in Q3 FY12 interims. The bank’s research team believes Shree Cement is likely to report a 253 per cent jump in earnings, as it not only benefits from the strong demand in northern India but also from the recent fall in petroelum coke prices and higher power sales volumes.
