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No respite in 2009 - Views on News from Equitymaster
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  • Jan 6, 2009

    No respite in 2009

    Cement makers start shutting down plants
    Cement companies are having a tough time. Faced with the prospect of shrinking demand, over supply and low utilization levels, many of them have resorted to shutting down some plants especially in the North. For instance, ACC had closed one of its clinker kilns in Himachal Pradesh due to excess piling up of inventory. The Northern markets are facing a problem largely due to the cement imported from Pakistan, which is cheaper than what is produced domestically. Infact, as reported in a leading business daily, the oversupply situation is set to get worse with as much as 7 MT set to make its way into India and the Middle East. Inability to recover from developers after huge credits being given to them has also impacted the cement companies across the country.

    The cement sector is expected to witness subdued growth of 7% to 8% in the next two to three years as compared to earlier estimates of 8% to 10%. The revised view is the result of global economic slowdown that has also impacted growth of the domestic economy. From a medium term point of view the sector is likely to garner lower realisations and the same is expected to exert downward pressure on margins apart from increase in costs. However, the prospects of the cement sector for the long term remain intact owing to the need to build up infrastructure to boost economic growth and on account of unfulfilled demand for dwelling units.

    Ranbaxy drags down Daiichi
    Ranbaxy's promoters may have made a killing by selling their stake to the Japanese drugmaker Daiichi Sankyo, but the same cannot probably be said of the latter. Ranbaxy's tryst with the US FDA has impacted its sales and profits and the same is expected to have an impact on Daiichi too. As reported in a leading business daily, Daiichi is expected to book more than US$ 3.3 bn (300 bn yen) in losses as a result of the fall in the stock price of Ranbaxy ever since its troubles began. This means that Daiichi will be forced to post its first ever loss at the net level and the same has been pegged at 200 bn yen.

    Meanwhile, Ranbaxy's woes continue as the company is unable to launch the generic version of GSK Plc's drug 'Imitrex' for which it had reached a litigation settlement deal with the former as there seems to be no signs yet of the issues raised by the US FDA being resolved any time soon. But Ranbaxy's loss is Dr.Reddy's gain and the latter who had also entered into a similar agreement with GSK Plc will stand to gain in the form of higher revenues and profits from this drug.

    More heartaches for the global economies in 2009
    The world has left 2008 behind it but 2009 is not expected to get any easier. According to Bloomberg, corporate earnings will continue to slump into the first half of 2009 amid the first simultaneous recessions in the US, Japan and Europe since World War II. Besides the US, where the profits of biggies will dip in the first half, resulting in eight straight quarters of declines, the adverse impact will be felt in Europe and Asia too which are battling lower demand for exports and retail goods. Companies are also under tremendous pressure as demand is waning, cash balances are dwindling and bank lending has become tight.

    While profits will rise 4.3% for the full year in the US, profits in Europe are expected to decline for all of 2009 and the situation in Asia could worsen as the recession has not fully hit there yet. In the US especially, retail, finance and auto companies may still report losses while software and healthcare companies will see growth in profits. Half of Asia is most likely to be in recession this year as a US$ 700 bn drop in export earnings causes economies in Japan, Hong Kong, Singapore, South Korea and Taiwan to shrink. Thus, companies will really see their mettle tested this year and the focus will be more on curtailing losses and spending.



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