Cement: What does the future hold?

Companies have started announcing results for the full year ended FY10. Signs of economic revival were visible in FY10 and companies across sectors gained on account of improvement in the economy. They started building order books, reporting higher sales, etc. Same was the case with cement companies. In this article, we shall take a look at how cement companies performed in FY10 and the growth prospects going forward. The year gone by...
Cost pressures: Cement companies witnessed higher dispatches in FY10 as compared to FY09. But higher sales do not mean higher profitability. Increase in costs also needs to be taken into account. In FY09, the companies utilised piled up inventory of fuel (coal, petcoke, etc). However, the cost of input costs marched northwards during FY10. This exerted pressure on margins and hence profitability of companies. Increase in crude and crude derivatives not only led to higher cost of production but also affected transportation and logistics costs. Thus, operating margins come under pressure.

But only few were affected: Margin pressure was not witnessed by players across the sector. This is because cement is a regional story and profitability for cement producers also depends upon realisations. A percent change in realisations has a significant impact on profitability.

Currently the northern and eastern regions are enjoying the benefits of infrastructural activity. The central region is also witnessing increase in demand. On the other hand, over supply has dogged the southern region. Thus, southern cement manufacturers witnessed margin pressure, while players catering to other regions were still reporting expansion in margins or stable margins.

Some major developments during the year
Before we take a look at future prospects, we would like to highlight some major developments during the year. Aditya Birla group took steps to consolidate its cement assets under one entity. The actual consolidation will happen in FY11. But the steps in this direction were taken in the financial year gone by. This was done by demerging its cement business which was part of Grasim Industries. The de-merged entity named as Samruddhi Cement would be merged with UltraTech Cement by the end of June 2010.

Dalimia Cements also announced restructuring plans to delink its cement and sugar business. The nature of technology and risks that surround both the sectors are diverse. Thus this was done in order to unleash growth by identifying opportunities separately in both the sectors.

India Cements, a southern major, ventured into the northern region to diversify revenues and benefit from the healthy demand witnessed in the northern region. India Cements acquired Indo Zinc Ltd, a Rajasthan based company in order to set up 1.5 m tonnes of cement plant within the region.

The way ahead…

Going forward, we expect cement volumes to be on the higher side. However, rising costs and declining cement prices would hurt margins of the cement manufacturers in the medium term. Any delays in upcoming capacities will provide some cushion to falling margins. Shortfall in availability of railway wagons could be another boon for the sector. The players who will be able to contain rise in cost of production and optimsie rail road mix would stand to gain.

We have a positive view on the sector from a long term perspective. However, in the medium term we expect prices to come under pressure as planned capacities become operational. This would affect margins of the players and hence returns to shareholders.