Cement prices jump; stocks rally on optimism

Cement stocks, mainly those of south-based firms, rose on Thursday on news of a sudden 3-30% increase in cement prices. Shares of India Cements Ltd, Andhra Cements Ltd and HeidelbergCement India Ltd, with higher exposure to the southern markets, rallied by 5-7%, with the mood upbeat in the rest of the sector too.

 

Reasons for the price hikes vary. Pessimists say that southern firms had little choice, given their deplorable performance with margin erosion in recent quarters. For example, March quarter realization of southern firms like Ramco Cements Ltd and India Cements dropped from the year-ago levels. With operating costs like power and freight remaining high, margins contracted sharply. The former’s operating margin plummeted by 780 basis points, while the latter ended the quarter with a net loss, after operating margin fell by half.

 

Even the performance of pan-India firms was not spectacular. UltraTech Cement Ltd and ACC Ltd reported a 250-270 basis points operating margin contraction in the March quarter from the year-ago period. Demand was flat in a normally good quarter, although cement prices rose in the north and east. 

Analysts say that the profitability of southern cement firms was the worst in several years, and the companies had little choice but to increase prices for survival. With the monsoon around the bend, a price moderation is not ruled out, which would otherwise have impacted margins. 

 

Optimists say that the worst is over. Cement demand, which grew at a compounded annual growth rate (CAGR) of 6% in the last four years until fiscal 2014, has bottomed out and will get better. Meanwhile, entry barriers because of high capital costs and long gestation periods, low limestone reserves and non-remunerative cement prices would impede capacity additions. A Motilal Oswal Financial Services Ltd report says that capacity addition will decelerate from 10% CAGR between fiscal 2010 and 2014 to 6% from 2014 to 2017. This, along with better demand, should bring back pricing power to cement firms for the long term. One cannot rule out discounts and small price cuts during the monsoon.

 

At this juncture, all eyes are on fiscal 2015, which is likely to see consolidation, followed by growth in realization and profitability in the second half. That said, the south will continue to see stiff competition, which would weigh on cement prices. The pan-India firms, however, displayed resilient balance sheets in spite of capex for adding capacity. 

 

These firms would, therefore, gain from a revival of the investment cycle, as capacity utilization improves and the big companies get a bigger market share, given their wherewithal to combat competition.

 

 

Courtesy: Cement prices jump; stocks rally on optimism Via livemint