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Cement: Better times expected - Views on News from Equitymaster
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  • Apr 3, 2003

    Cement: Better times expected

    It was a relatively mixed year for the cement sector as a whole. Cement prices suffered throughout the year mainly due to overcapacity situation prevailing in the country. While demand was robust due to increased demand from highway project as well as housing infrastructure sectors, it still could not effectively prevent the considerable fall in prices of cement in the country.

    According to CMIE, while the production in the period between April and January FY03 has grown by a considerable 11%, the prices have fallen at a more drastic pace at nearly 12% (whole sale prices in the Mumbai market). If one were to observe the movement in prices on a quarter-by-quarter basis, prices touched their lowest levels in the second quarter of FY03. As a consequence, the performance of the major cement producing companies suffered the most in the second quarter (September quarter). Companies like Gujarat Ambuja, Grasim and ACC reported a 16%, 15% and 13% fall in realisations respectively during this period.

    Top 5 losers
    (Rs) Mar-03 Mar-02 Change
    India Cements 13 30 -57.0%
    Birla Corporation 12 17 -31.4%
    Mysore Cements 5 7 -24.4%
    Prism Cement 4 5 -20.6%
    Gujarat Ambuja 160 200 -20.2%

    This fall was however corrected in the third quarter and realisations are expected to be maintained at these levels in the fourth quarter too. If one were to look at the demand pattern, incremental demand was concentrated in the northern, eastern and western regions of the country for the first two quarters of FY03. This was largely because highway projects were concentrated in these regions. As these projects got completed, the focus shifted to the southern region. Consequently, in the last two quarters cement demand in the southern region has been strong due to incremental demand from the highway projects. Overall demand has been fairly strong from the housing sector across the country. Even poor monsoons in FY03 helped in a way as construction activity continued, ensuring cement demand.

    But the damage had already been done. While all the major cement companies were able to improve their volume sales, adverse realisations took a heavy toll on their operating margins and consequently their earnings. The adverse impact on earnings has been amply reflected in the movement of stock prices of these companies. Pivotal Gujarat Ambuja has lost as much as 20% off its stock price in FY03. ACC (10%) too has been weak on the bourses. Unlike Gujarat Ambuja, ACC does not have strong operating margins to protect itself from adverse movement in realisations and hence the impact on its earnings has been more severe than Gujarat Ambuja.

    Diversification pays
    PAT (Rs m) 9mFY02 9mFY03 Change
    ACC 779 452 -42.0%
    Gujarat Ambuja 977 741 -24.2%
    Grasim 2,236 3,670 64.1%
    L&T 1,600 1,674 4.6%

    Diversified cement majors L&T and Grasim on the other hand, managed to gain ground in FY03. In the case of Grasim this can be attributed largely to the diversified nature of its business. While the cement division of the company suffered in FY03, its VSF division has done extremely well. So much so, that the earnings of the company have improved significantly in FY03. L&T on the other hand, has been volatile in FY03 largely due to speculation regarding the demerger of its cement division. The issue of the demerger came up when Grasim made an open offer for L&T at Rs 190. This met with stiff resistance from the majority shareholders in L&T, i.e. financial institutions. Due to the continuing impasse regarding the demerger, the stock has currently settled marginally above its March 2002 levels.

    Top 5 gainers
    (Rs) Mar-03 Mar-02 Change
    Mangalam Cement 6.75 3.5 92.9%
    Grasim 330.7 288.9 14.5%
    L&T 184.65 180.8 2.2%

    What we can observe from the performance of cement stocks in the last year is the fact that diversified players like Grasim and L&T have done better in an adverse realisations scenario compared to their pure cement peers like ACC and Gujarat Ambuja. In the short term, the oversupply situation is likely to sustain especially in the western region where a new capacity (Sanghi Cements) has come online. Also, the lag effect of poor monsoons in FY03 is likely to take a toll on cement demand at least in the first two quarters of FY04.

    In the long term however, due to lower planned capacity additions and a robust demand growth for cement in the country, the imbalance between demand and supply in expected to correct soon. Also the main driver for cement demand, the housing sector, is likely to see continued demand owing to the existing tax incentives on loans and the demand supply gap existing in the housing market. In addition to this, government’s initiative to improve the highway, port and airport infrastructure in the country will go a long way in stimulating cement demand in the future. Until then, stock prices of pure play cement companies may languish at these levels.



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