BUILD UP ON THOSE CEMENT STOCKS

By Ruma Dubey

Cement companies have been on a roll! Beginning with Ultratech Cement, almost all cement companies have reported fantabulous numbers for Q1FY17.

Throughout these numbers of all companies across the board, the one thing which ran common, apart from profits, was excellent cost management and operational efficiencies. All companies reported a major jump up in EBITDA margins and this was on account of two factors – raw material costs and power & fuel costs.

Let us first look at Ultratech Cement.  The largest cement maker of India, this Aditya Birla group company, on the basis of its operating efficiency has managed to debunk lower realisations and posted a 29% (YoY) jump in consolidated net profit at Rs.780 crore on a 4% jump in net sales at Rs.6538 crore. It reduced its costs by 7% and is now one of the lowest cost per tonne cement maker – total cost for the quarter was at Rs.3643/tonne. Energy cost was down 24% (YoY) and this was thanks to the higher usage of petcoke. Thus its kiln fuel mix now comprises of 74% pet coke, 18% imported coal and 8% indigenous coal and others. It is this change in fuel mix which is giving the company very good operating efficiencies, translating into healthier profits. Its EBITDA margin has risen from 21% to 25%.

Ambuja Cement, for its second quarter ended 30^th June 2016 (31^st Dec year ending), posted a 76% (YoY) jump in net profit at Rs.399 crore on a mere 2% rise in total income of Rs.2561 crore. Like UltraTech Cement and even ACC, this was thanks to very good operational efficiencies. A 5% (YoY) drop in raw material costs, 20% decrease in power & fuel cost, 8% fall in freight and forwarding costs and overall 7% drop in total costs led to an increase in the bottomline. EBITDA margins improved to a very good 23.5% from 15.3%.

Unlike Ultratech which showed a jump in volumes, ACC, like Ambuja showed a drop in sales volume but its fall was very sharp – over 9% fall at 6.36 mtpa while realizations slumped 8%. Consolidated net sales were up 1.5% (YoY) at Rs.2927 crore and once again lower costs came to the rescue to shore up the bottomline’s a bit. The company ended the quarter with a consolidated net profit at Rs.227 crore, down 4%.

We saw JK Cement also report good numbers for the quarter, once again on the back of lower power and fuel costs. Like all cement companies, JK Cement too reaped benefits of lower fuel costs, which was down by a good 22% (YoY).  This along with the 9% rise in net sales at Rs.887 crore helped boost the bottomline. EBITDA margins rose from 10.9% v/s 19.7%. Net profit for the quarter was up from a mere Rs.1 crore to Rs.61 crore.

This has been the trend right across the board; typical of the first quarter, a seasonal factor. But Q2 might not be as trailblazing as once again, season will play spoilt sport. Q2 is monsoon ­season and thus weak. This is the time when price of cement come down as demand is low. Due to this low demand, cement companies also take advantage and plan their maintenance shut down.

Currently prices are indeed down – in North India prices are down 2-3% or Rs.20-25/bag; Eastern India prices are down by Rs.5-10/bag. In South India, this not monsoon time and prices there remain firm – up by Rs.20-25/bag. Cement analysts say that prices have fallen seasonally but the drop is not as much as normal.

Cement companies and stocks are on the uptick; that’s the bottomline. Q2 v/s Q1 might not exactly be great buy YoY, it will most certainly be good. So hold on to that cement stock and build up; Ultratech remains one of the best bets in the sector for the long term.