CEMENT - FILLING UP THE CRACKS?

By RumaDubey

Unlike November, the December sales figure for the three bigwigs of the Indian cement sector – ACC, Ambuja Cement and Ultra Tech was much better. And better because this month, the MoM sales and production figures were higher. YoY, as we have stated earlier, the figures will be good due to the low base effect.

Take a look at the table given below and the numbers speak for themselves. Yet, all the three stocks closed in the red on Friday. Last month, after the November sales numbers were announced, despite a MoM fall reported, all the three were in the green and today, they are all in the red. The reason?

The news is that price cuts have begun. It has begun in Himachal where price has been cut by Rs.25 per bag. The Himachal Govt has been persuading these cement companies to cut prices as they were higher than the neighboring states. But the companies did not relent, stating that higher price was justified by the higher costs they incur on transportation. Matters got heated to such an extent that the Chief Minister of the State wrote to the PM, urging him to include cement as a controlled item under the Essentials Commodities Act.  And finally the companies have relented and the price for per 50 kg bag was cut by Rs.25. For the stock market, this was naturally not good news and thus the stocks were in the red.

With two good months of good sales and with cement prices at never before seen heights - Rs.280 to 250/bag of cement, probably, historically, the highest price ever, and it has set in from mid of September, the expectation is that cement companies might surprise with a good set of numbers for December quarter. And the news on the street is that price is only expected to go up further by around Rs.10/bag very soon in northern, central and eastern regions. Price in South has remained stable and is likely to remain so in the current month.

More than increase in demand, the rise in price is due to reduction in utilisation level, being labeled by manufacturers as ‘production discipline’. Like in the South, despite fall in demand, price remains steady at Rs.260-270/bag and the same methodology is now being adopted across the country. Thus production discipline will dictate cement prices and not demand.

Being more of a ‘manufacturer’ led rally, more than by the market led demand-supply trend, the perception is that this ‘strength’ which we see in cement might not last too long. It could sail high in the second half of the fiscal, which as such, cyclically, is the best period for cement companies. H2 performance is sure to be much better than H1.

Word on the street is that prices could go up further. The current price cut, from Rs.280 to Rs.265 per bag is being termed as temporary. With demand expected to perk up as winter subsides, price is also expected to go up. In Jan, price in northern India have already seen a hike of Rs.5-8 per bag.

The outlook for the sector remains cautious despite the higher realization and higher despatches as it could be partly offset by higher freight charges and interest expenses. Also there looms a price hike in coal under the new pricing regime by Coal India. If that too happens, we can surely expect margins to be either show pressure or remain status quo.