Jan 22, 2003|
Cement: Dull performance...
The cement sector's performance so far can be summed up as unimpressive and things will remain unchanged at least in the current quarter as well. Hence, it goes without saying that FY03 will go down as another forgettable year in the history of the industry, as far as financial performance is concerned. The only saving grace seems to be the healthy volume growth that the industry is clocking as a result of government's thrust on road projects and continued demand from the housing segment.
The reason for the current state of affairs is an open secret and the blame lays squarely on the players in the industry for frenzied addition of capacities in order to capitalize on the largesse doled out by state governments in form of tax breaks. The 'cartel', which was quite strong in FY00, resulting in peak level prices in most states, took no time in crumbling and we seem to have come a full circle in a very short span of time.
Familiar story of falling prices and declining margins...
Note: Data pertains to top pure cement companies
Excess capacity resulting in adverse demand-supply situation and declining prices is what the industry has witnessed in FY03 so far. As a result, the financial performance of most cement companies for the first two quarters of FY03 (YoY) has been disappointing. And as numbers keep pouring till the end of next week, third quarter too is likely to have nothing to write home about. The story of declining margins is expected to continue for all cement companies in the third quarter and markets seem to have already discounted this fact. This is evident in lackluster performance of cement scrips for the past few weeks.
Given the current price situation prevailing in the country, though the (QoQ) performance in the 4QFY03 will be a shade better, YoY numbers will continue to disappoint due to spike in cement prices during 4QFY02.
The Indian stock markets have clearly given thumbs down to the sector with most cement scrips in the red for the past couple of quarters. There has been considerable erosion in market capitalisation of all major cement in the last 12 months as a result. We believe that in the coming weeks, major cement companies will continue to witness selling pressure due to yet another disappointing performance in the quarter.
However, having said this, all is not lost for the sector, which fares better than most sectors in terms of volume growth, thereby making dismal price scenario a short-term phenomenon. The price scenario is expected to improve gradually in FY04 on the back of sustained demand growth and so will the margins of producers during the second half of the next year. Volume growth is expected to continue at around 8% in FY04 as well, narrowing the demand-supply gap to a fair extent. Hence, we believe the top cement scrips, which seem out of favour now will make a comeback in another 6-7 months. Till such time, the field is open to bargain hunters.
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