Cement makers face multiple adversities

Cement firms have a problem of plenty. With capacity additions continuing, the industry surplus is expected to rise until fiscal 2013. This is assuming a demand expansion that at least equals the anticipated growth in the country’s gross domestic product of around 8%.

But concerns are building up as the demand growth had halved to 5% compared with the past three years. May saw scant growth in demand with the forthcoming monsoon further worsening the situation. An Alchemy Share and Stock Brokers Pvt. Ltdreport indicated that cement prices fell by 8-10% across regions in April and May.

A bigger negative is the rising clinker (from which cement is made) inventory with most cement firms, which adds to holding cost. Besides, for the want of storage space, cement firms may be forced to shut operations if clinker stock rises.

In other words, the buoyancy seen in cement prices and higher realizations during the last six months were perhaps a flash in the pan. No wonder, shares of both large-cap firms such as UltraTech Cement Ltd, ACC Ltd and Ambuja Cements Ltd, along with mid-cap firms such as Madras Cement Ltd have run downhill since May.

Aggravating the situation was the hike in excise duty and the increase in coal prices that threaten to negate the benefits of higher realizations in the last few months. Raw material costs are estimated to have surged by one-and-a-half times in the last five years. Also, the diesel price hike is expected to affect freight costs and also fuel costs for firms that use generators to back their power requirements.

A report from Centrum Broking Ltd estimates that the recent Rs3 per litre hike in diesel prices will have a direct impact (transportation of end products) of 0.85 percentage point on the earnings before interest, tax, depreciation and amortization margin—a key measure of profitability—of cement makers, besides an indirect impact of 0.62 percentage point in procuring limestone and coal.

Cement firms seem to have exhausted efficiency improvements by setting up captive power plants and making blended cement. Given these odds, it’s a long way to recovery. A report by Macquarie Equities Research Ltd sees a two-year wait for a bull cycle for cement.

Only huge spending in infrastructure and housing will churn demand growth and stir the sector from its inertia.


Source:- http://www.livemint.com/2011/06/27234124/Cement-makers-face-multiple-ad.html


Thanks
Ankit Wani
Intern @ DENIP Consultants Pvt. Ltd.