There’s a visible slowdown in the real estate and infrastructure spaces which could lead to demand for cement slackening, says the management at Ultratech Cement. Supplies to these key sectors typically account for around 85 per cent of the revenues of the industry.
As such, demand, which was earlier estimated to grow at 9-10 per cent, may taper off to about 7 per cent. Already, some additional supply —around 16 million tonnes — has come into the marketplace, in the current financial year, and there could be more before the year is out.
As a result, industry watchers are pencilling in a surplus of around 10 million tonnes. Unless the pace of real estate projects pick up and there are more takers from other sectors too, cement maker are going to have to live with not just with lower prices but perhaps smaller volumes too.
The silver lining is that fuel prices have come off sharply; prices of imported coal which were ruling at close to $200 per tonne have fallen to $120 per tonne. The impact of this of course, will be felt only in the March 2009 quarter because manufacturers would have stocked up for the December 2008 quarter.
That’s why Ultratech’s operating profit margins in the September 2008 quarter came off by 710 basis points y-o-y to 21.3 per cent, resulting in a fall in the net profit of 12 per cent to Rs 164 crore. It’s unfortunate that despite revenues increasing by a decent 20 per cent to Rs 1,396 crore, the firm wasn’t able to hold on to the bottom line.
Things should start looking up early next year by which time Ultratech will have more captive power capacity, which, together with the lower price of imported coal, should bring down costs. Prices of cement have remained fairly stable so far, even going up in the southern and western regions.
But, if as the management says, demand is showing signs of coming off, prices could fall by about 5-10 per cent. In the September quarter Ultratech’s realisations were driven by strong prices in the south, where it sells about a fourth of its volumes. At the current price of Rs 368, the stock trades at a shade over 6 times its estimated FY09 earnings of Rs 60.
