Cement cos’ margins may remain as flat as demand

Source: THE ECONOMIC TIMES

Although cement demand has historically been better in the March quarter, large cement manufacturers with more than 15 million tonnes of capacity may not report any material rise in operating profit margins.

This is due to their inability to increase product prices in the first two months of the quarter. In the nine months to December 2017 quarter, their margins were 15-30 per cent depending upon the reach and pricing power.

The demand strength from the real estate, individual home builders (IHB) and infrastructure segments plays crucial role in price trend. This time around, demand from the real estate and IHB segments has been weak thereby curtailing major increase in cement prices.

While demand from the infrastructure segment has been stable, it accounts for just over one-fifth of the total cement demand.

It may not significantly offset the slowdown in real estate, which forms nearly two-thirds of the total cement consumption. Within housing, rural housing accounts for 30-35 per cent of the demand, and the rest is owing to urban housing.

Besides weak demand, cement companies are facing higher input costs. In the second half of 2017, prices of petcoke, imported coal and diesel rose sharply. In January 2018, Coal India increased price of linkage coal, which would add to the cost of cement production.

Despite higher raw material costs, companies have been unable to raise prices on sequential basis, unlike in the past when there was a price increase during the March quarter.

Except in the eastern region, cement prices have been range-bound in rest of India. Low-cost housing is driving demand in the eastern region. The average all-India cement price has not moved up from the December quarter levels of Rs 285 per 50 kg bag. In the eastern region, cement price is 3-10 per cent above all India average.

Investors will be better off by enhancing their exposure to large pan-India companies such as UltraTech Cement, ACC, Ambuja Cements, Shree Cement, Dalmia Bharat and The Ramco Cement. These companies will be able to raise sales volumes once the demand picks up given their size and geographical reach.

Source: THE ECONOMIC TIMES

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