Price increases help cement sales, but can't offset costs

A revival in demand from the real estate segment and cutbacks in production that supported prices helped cement manufacturers report a rather encouraging set of numbers for the March quarter.

All the three cement majors – UltraTech Cement, Ambuja Cements and ACC – have shown good sales growth. Profits, however, haven't kept up with the momentum seen in sales, on pressure from rising input costs.

Despatches

While ACC reported a 12 per cent growth in despatches for the latest March quarter, Ambuja Cements reported a 7 per cent growth.

UltraTech Cement, the single largest player in the country with a 20 per cent share in the cement market, reported a 1 per cent increase in despatches.

The cement industry has closed the year 2010-11 with a despatches growth of 4.5 per cent, the lowest in last several years.

The increase in cement prices was quite sharp during the quarter. The all-India average price at the end of the quarter was Rs 280/50 kg bag, which is an increase of 15 per cent from levels in the same period last year.

On strength of the price

The pick-up seen in demand in the March quarter has to sustain for at least another quarter before we conclude that demand is back on a strong footing. The March quarter performance of companies shows the impact from improved realisations and the price discipline.

At a capacity utilisation of 75 per cent, producers kept supplies tight. Cement prices increased sharply across regions – in Chennai, for instance, in the three months between December and March, prices increased by Rs 20/bag to Rs 277.

Seeing the market behaviour of the last six months, it looks like cement manufacturers will be able to hold prices up for some more time through production ‘discipline'.

Input prices to check margins

In the forthcoming quarters, investors of cement companies have to keep an eye on input prices – mainly coal – as it could take away benefits from higher realisations.

The cost of imported coal, for instance, has risen 25 per cent in the last one year; in the domestic market coal price has risen by an even higher 30 per cent.

This apart, rising logistics expenses, higher cost of fly ash, slag and other raw materials too have been playing spoilsport. The impact: drop in margins.

In the March quarter, though, ACC witnessed a 14 per cent sales growth; the company's operating profit was down 21 per cent. ACC's operating profit margin was down by 800 basis points to 19.4 per cent.

Ambuja Cements, too, witnessed its operating margin contract. However, being the most efficient player in the industry, Ambuja Cements managed to hold operating margin at 28 per cent (down from 32 per cent last year).

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