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Cement: Impact of price hikes

Jun 16, 2004

Despite a favorable pricing environment in FY05 and positive outlook for the next two years, cement stocks have been trading weak on the bourses in the recent past. Even today, the stocks have opened lower. One of the reasons is the sharp rise in crude prices, which could have a major impact on power cost of cement majors. Added to this woe, the government has increased the coal prices yesterday. We try and analyse the impact of such moves on cement stocks.

The chart above indicates coal cost as a percentage of net sales of key cement players in the country (FY03 data). As is evident from the table above, on an average, coal accounts for 10% to 11% of sales. Though coal as a percentage of sales is lower for Grasim, it has to be remembered that Grasim also has presence in other segments like textiles where coal is not required and to that extent, the percentage is muted. As far as Gujarat Ambuja is concerned, the impact of rise in coal prices is likely to be lower owing to the fact that the company imports a larger quantity. As a result, the domestic price hike will not have a major impact. For focused cement majors, coal is one of the sources of power. We believe that this price hike of 17% in coal prices will have a negative impact on margins (except Gujarat Ambuja).

Margin squeeze?
(% sales)PowerFreightTotal
Guj Ambuja24.8%15.8%40.6%
Grasim17.0%10.1%27.0%
ACC11.5%16.4%27.9%
India Cements36.4%11.8%48.3%
Madras Cements27.2%10.9%38.1%

It is not just coal prices, but also the increase in prices of diesel and petrol that could have a impact on cement players. Like any other commodity, proximity to raw materials (limestone, coal, furnace oil and so on) and proximity to markets are key factors that determine profitability over the long-term for cement companies. The hike in petroleum product prices could increase freight and power cost in the near future. As is evident from the table below, both these costs combined, accounted for 27% to 48% of net sales, which to us, is a concerning factor.

But what will be the net impact on margins considering the fact that cement prices have moved up sharply on a YoY basis? Just to put things in perspective, cement prices touched as high as Rs 165 per 50 Kg in Mumbai market in the recent past. Though prices have softened off late, this is a normal phenomenon. During monsoons, construction activities are affected and consequently, demand for cement also slows down. Looking at the demand growth prospects in FY05 (9% to 10% expected rise), we are looking at a 5% to 6% growth in price realisations. To that extent, there exists a cushion. While the impact of higher coal and fuel costs cannot be understated, the net impact of the same on top cement players is likely to be lower. We may have to re-look at our margin estimate for cement manufacturers in FY05.

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