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Cement: Realising stability - Views on News from Equitymaster
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  • Aug 5, 2003

    Cement: Realising stability

    Cement companies have been the victims of weak prices for some time now. But to a certain extent they have themselves to blame. Uncontrolled capacity additions in the past have led to an overcapacity in the industry. Since cement is a capital-intensive industry, in order to recover the huge operating costs involved, the companies have to rely on huge volumes. This often tends to create an oversupply situation in the industry thus dragging down the prices and putting pressure on the operating margins of the companies. The fall in realisations can thus have a considerable impact on the bottomlines of the cement companies. In this article, we will therefore try and study the changes in the price fluctuations in the cement industry and its impact on the bottomlines of some of the major cement companies.

    The following graph shows the trend in cement prices in the year 02-03

    *Prices in the Mumbai market

    The above figure indicates considerable volatility in the cement prices. After remaining stable for the first three months, the prices fell by almost 19% in August, before staging a recovery and since then have remained stable. Prices in the Mumbai market have thus fallen on an average by 9% in FY03. Although the figures are for the Mumbai market, fall in the realisations has been varied across different regions of the country. In the southern markets for example, Madras cement, one of the leading players has witnessed a drop in realizations of as high as 22% as indicated from the following table.

    FY03 particulars
      Volume Growth Growth in Realizations OPM Net Profit Growth
          FY02 FY03  
    ACC 15.0% -10.0% 15.0% 10.0% -30.0%
    Gujarat Ambuja 37.0% -9.0% 29.0% 24.0% -8.0%
    Madras Cement 10.0% -22.0% 25.0% 24.0% -52.0%

    From the table above we notice that, while ACC and Madras Cements witnessed significant erosion of their bottomlines, Gujarat Ambuja has been able to withstand the tide. Gujarat Ambuja’s performance in FY03 however, is an exception because it is not only the most cost efficient producer of cement in the country but also the huge volume growth of 37% (mainly due to its new Chandrapur plant) has helped the company to mitigate the effects of lower sales realizations to a large extent. Moreover, it caters largely to the non-institutional segment such as the housing segment, and hence the dip in its sales realizations has not been as adverse as its peers. Also since the company is June ending, it got the benefit of stable cement prices in the June quarter. This to a large extent helped the company to post a healthy profit growth of 19% in FY03, when all its peers reported a decline in profits.

    While realizations have taken a plunge, cement companies have been able to redeem their fortunes due to the strong growth in cement volumes sold by them. This has in a way helped them to restrict the fall in their bottomlines. That apart the cement industry in India has become highly cost efficient in the recent times as a result of sustained efforts by the companies. The interest incidences have also come down, partly due to lower interest rate regimes and partly due to efficient working capital management. Going forward if the industry has to cash in on the strong demand for cement, the gap in the demand supply mismatch will have to be plugged so that the prices stabilize and the competitors will have to stop resorting to undercutting of prices.

    The situation seems to be improving as the prices seem to have stabilized in the recent past. With no greenfield expansion in sight anywhere in India, except the 2.6 m tonnes of greenfield expansion by Sanghi Cements which is already operational, demand is likely to inch closer to supply. On the demand front, government initiatives in the infrastructure sector, robust housing sector demand and now the high probability of normal monsoon would mean that the demand is likely to grow by 9% as predicted and may be even more. The realisations hangover may be finally over.



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