Cement: Benign mismatch! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Cement: Benign mismatch!

Nov 14, 2006

The Indian cement industry is second largest in the world after China and has grown at a CAGR of 8% in the last decade. The Indian cement sector has evolved significantly in the last two decades, going through all the phases of a typical cyclical industry. After having gone through a period of over-supply and the phase of massive capacity additions (latter half of the previous decade), the industry is currently in a consolidation phase, with capacity additions coming up to cater to the increasing demand. Demand has been driven by a booming housing sector and increased activity in infrastructure development such as state and national highways. While the demand is growing at a robust pace of 8% to 10% annually, the paucity of major capacity additions is putting upward pressure on the cement prices. The effect of this is clearly witnessed in the robust topline and bottomline growth achieved during the quarter July to September 2006 by major cement companies. It's all in realisations: Cement companies managed to increase capacity utilisation to cater to the growing demand. But the major boost in the topline is on account of better realisations. During the quarter, sales were higher by 9% YoY and the prices scaled up by 35% YoY. This helped companies report outstanding performance during the quarter. It must be noted that cement consumption in the southern region has registered an impressive growth of 13% YoY and Madras Cements being a key player in the southern states of India, has benefited from the same. Gujarat Ambuja's production and despatches grew by 9% YoY and 10% YoY respectively, largely in line with the industry growth. The company has achieved this growth despite heavy monsoons and floods in the regions where company has its production facilities. Gujarat Ambuja, the larger exporter of cement, has also benefited from the 30% YoY growth in export prices. Also, the diversified major, Grasim, posted good results during the quarter. Thanks to the excellent performance of the cement business segment, in which the topline grew by 47% YoY and bottomline by 26% YoY, the company posted 80% YoY growth in profit. Ultratech, a 51% subsidiary of Grasim, benefited by the strong volume sales which grew by 17% YoY and significant improvement in realisations, both in the domestic and export markets.

July to September quarter
% YoY growth ACC Gujarat Ambuja Grasim Ultratech Madras Cements
Net Sales 30.4 50.3 22.7 58.3 65.50
EBITDA 126.5 108.9 65.4 291.9 208.1
Net Profit 0.3 225 80 1274 378.8

Surprising Margins: Besides the higher realisations, few companies have also managed to lower costs, by improving operational efficiencies. The improved bottomline growth has been backed by lower costs and growth in other income.

As in the case of Ultratech, a substantial improvement in operating margins, coupled with a 47% YoY rise in other income and lower interest charges have helped the company report a profit against a loss in the corresponding quarter last year. Similar is the case with Gujarat Ambuja wherein higher other income and lower interest charges helped achieve 225% YoY growth in net profits, despite rising input costs, such as coal and petroleum products.

ACC, one of the oldest cement companies, managed to cut raw material and staff cost but higher coal and petroleum products prices did have a negative impact on overall cost, which have grown by 15% during the quarter compared to same period last year. The net profit of the company grew by 338% YoY, if we exclude the income of divested refractory business.

Amongst the companies discussed so far, the biggest beneficiary has been Madras Cements, which operates in the region of demand supply imbalance (south). It is the first company in south India to convert all its capacity to the energy efficient dry process, thus reducing its power costs by almost 10% YoY. Reduction in interest expenditure on account of increased cash flows from operation and extraordinary growth in operating profits helped company achieve 379% YoY growth in bottomline.

Also, Grasim, the flagship company of Aditya Birla Group, has benefited from higher other income and lower interest cost. But it being a diversified conglomerate, the growth was also aided by the good performance of the VSF business (contributes 24% to topline). Had the company's chemicals and sponge iron businesses done better, the results would have been more enthusing.

What to expect?
Being a core infrastructure sector, the growth of the cement industry tracks the GDP growth of the country. Currently, the demand is growing at a rate of 8% to 10% annually and the upcoming capacities will start their operation by the end of 2008. Riding on strong demand, no major capacity additions has led prices to scale up by almost 35% YoY during the quarter. However, once the new capacities become operational (by FY08), we expect the prices to cool off.

While we continue to remain positive on the growth prospects of the cement sector in India, we are uncomfortable with the fact that the current valuation levels already seem to have factored in the medium term growth prospects in the sector. At the current juncture, we believe that the valuations of most of the stocks are stretched on an EV per tonne valuation basis. Hence caution needs to be exercised.

Equitymaster requests your view! Post a comment on "Cement: Benign mismatch!". Click here!

  

More Views on News

THE RAMCO CEMENTS Announces Quarterly Results (2QFY21); Net Profit Up 42.1% (Quarterly Result Update)

Nov 4, 2020 | Updated on Nov 4, 2020

For the quarter ended September 2020, THE RAMCO CEMENTS has posted a net profit of Rs 2 bn (up 42.1% YoY). Sales on the other hand came in at Rs 13 bn (down 3.9% YoY). Read on for a complete analysis of THE RAMCO CEMENTS's quarterly results.

HEIDELBERG CEMENT Announces Quarterly Results (2QFY21); Net Profit Up 7.3% (Quarterly Result Update)

Oct 27, 2020 | Updated on Oct 27, 2020

For the quarter ended September 2020, HEIDELBERG CEMENT has posted a net profit of Rs 624 m (up 7.3% YoY). Sales on the other hand came in at Rs 5 bn (down 1.6% YoY). Read on for a complete analysis of HEIDELBERG CEMENT's quarterly results.

AMBUJA CEMENT 2018-19 Annual Report Analysis (Annual Result Update)

Oct 20, 2020 | Updated on Oct 20, 2020

Here's an analysis of the annual report of AMBUJA CEMENT for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of AMBUJA CEMENT. Also includes updates on the valuation of AMBUJA CEMENT.

ACC 2018-19 Annual Report Analysis (Annual Result Update)

Oct 20, 2020 | Updated on Oct 20, 2020

Here's an analysis of the annual report of ACC for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of ACC . Also includes updates on the valuation of ACC .

More Views on News

Most Popular

This One Smallcap Stock is a Must Have in Your Portfolio (Profit Hunter)

Nov 11, 2020

Investing in this smallcap could open doors of huge, long-lasting wealth.

This Diwali Consider Richa's #1 Stock Pick for 2021 (Profit Hunter)

Nov 13, 2020

Why I admire the approach that Richa uses to zero in on stocks with huge upside potential.

Should You Buy Gold Now? (Fast Profits Daily)

Nov 11, 2020

Pfizer has announced a vaccine for covid-19. In response, gold prices have fallen. Should you buy? Find out in this video..

Don't Let Brokerages Fool You into Buying HUL & Nestle. The Real Money is in These Stocks Right Now... Views On News (Views On News)

Nov 12, 2020

Rahul Shah discusses why he preferred a little known stock over Nestle Ltd and how he was proven right.

US Elections: Won a Battle, Now the War (The Honest Truth)

Nov 13, 2020

Ajit Dayal on the urgent need to fix the disparity between the rich and the poor in the US.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

COMPARE COMPANY

MARKET STATS