Cement stocks plunge on poor earnings

Cement stocks have underperformed the broader market in the last one month on disappointments over their earnings for the March quarter. Against the 2 per cent drop in the Sensex since May, Ambuja Cements, Grasim Industries, India Cements, JK Lakshmi Cement and JK Cement have sunk 5-10 per cent.

FPI pares exposure

The shareholding patterns for the March quarter show that foreign portfolio investors have cut their holdings in several cement stocks in the quarter compared to end-December 2014. In Ambuja Cements, for instance, FPI holding has dropped by over 2 percentage point to 27.43 per cent. ACC, Grasim Industries, UltraTech Cement, India Cements, The Ramco Cements and JK Lakshmi Cement are other stocks where foreign institutional holdings have come down.

Drop in despatches

Cement companies have shown a dismal performance in the March quarter. But for a couple of players, most have seen a drop in revenue and profits. The big four players — UltraTech, ACC, Ambuja Cements and Shree Cement —ecorded 25-40 per cent drop in net profit led by lower realisations and a drop in sales volumes.

While the industry’s despatches during the quarter reported a 3 per cent growth, year-on-year, not all companies saw their sales volumes go up. UltraTech, ACC and Ambuja Cements reported 3-10 per cent drop in despatches. The slowdown in demand from rural India, poor offtake in infrastructure projects and unseasonal rains in February and March in many parts of northern India hit cement demand.

South-based India Cements and The Ramco Cements performed better than their peers in north, supported by better realisations (20-25 per cent year-on-year) and cost savings that buttressed margins. The Ramco Cements recorded a 273 per cent jump in profits. India Cements returned to profit from a loss last year. However, both companies saw a steep 16-20 per cent decline in sales volumes as retail demand was dismal.

Shree Cements was an outlier on the despatches front. It recorded a good 7.5 per cent growth in sales volumes, thanks to capacity addition. But weak realisations led to both revenue and profit being down relative to last year; profit margins came under pressure as well. The power segment too, didn’t fare too well on lower demand for merchant power.

Outlook

Rural housing makes for about 40 per cent of total demand for cement. If rural wages and agriculture income come down because of the poor monsoons this year, it will be negative for cement manufacturers. However, demand for better infrastructure with road projects now kicking off and a pick-up in urban housing demand may offer some growth. Southern cement players may see some relief if new infrastructure development in Seemandhra and Telangana progresses well and cement demand gather steam consequent to developments.