Even as analysts are sceptical of cement companies’ recent move to raise prices in the South, manufacturers of the commodity feel the hike was needed to trim losses on the back of a slump in sales in the last three months.
Several cement makers increased prices by Rs15-30 per 50 kg bag this week. The price in Andhra Pradesh has gone up to Rs175 per bag. In Tamil Nadu and Karnataka, prices have been raised to Rs200-210. In Kerala, though the price hike is yet to take effect, dealers said prices will go up to Rs220-225.
Dealers feel the move will eat into sales in a big way, given the slack season. “The timing of price hike is surprising. This is not the season for cement sales. In the South, cement sales pick up only from October. The hike in prices will neither give more returns nor will it help companies cover earlier losses,” said an industry source.
Cement sales generally improve in October and continue to rise till January. With a pause till March, sales tend to improve again till June.
Analysts also doubt the sustainability of the hike. Pinakin Parekh and Neha Manpuria, analysts with JP Morgan, said companies are hoping that at least half the announced increase remains. “We estimate March-11 exit capacity of 113 mt in south India, with likely demand of 60-65 mt. We thus think sustainable price increases are difficult,” they said in a report on September 7.
Ajit Motwani and Chandan Asrani, analysts with Emkay Global, said the latest cement price hike is amongst the highest in the south. “We remain skeptical of the effective price hike that the markets can absorb. Further, given that the price hike is not supported by cement offtake (regional and inter-regional) we are uncertain about the sustainability of the price hike,” they said in a report on September 8.
A senior executive with a cement firm, however, justified the hike. “It is a fact that the current month (September) always proves to be difficult for cement companies due to the rains. But, unless the companies attempt to hike the price now, it would be difficult to improve realisations during the peak sales season of October-January,” he said.
The largest cement players in the south, including India Cements, UltraTech and Dalmia Cement, together have a close to 45% share in the market.
Companies have adopted a two-fold strategy to keep sales going while maintaining realisations. “One, capacities or supplies can be cut down to sustain the price hike. Two, a marginal roll back of the price hike is possible in the next couple of weeks to keep the effective hike at Rs10-15 per bag to time the correction with the beginning of the sales season,” said a promoter of a cement company playing an important role in fixing the prices said on condition of anonymity.
Rupesh Sankhe, cement analyst with Angel Broking, said, companies had adopted a similar strategy to offset losses in 2001. “Companies with higher debt to equity ratio will find it difficult to sustain without the price hikes,” he said.
He justified the capacity trimming exercise, saying capacity addition in the South is moving well ahead of demand growth. “At present the installed capacity in the South is 91 mtpa whereas the demand is 57 mtpa for FY10. We expect the utilisation to remain at same level around 60-65% till FY12,” he said. “Approximately 8-10 mtpa was being channelised from the south to both eastern and western markets, which would subside. Post the monsoons, a price hike of Rs5-10 in the West can also happen” Sankhe added.
In FY11, the demand is expected to be 62 mtpa with a capacity installation of 95mtpa. In FY12 it is expected to increase to 109 mtpa installed capacity with a consumption demand of mere 68mtpa.
Cement makers are also not finding the going any attractive, particularly in key markets like Andhra Pradesh, which accounts for about 15-20% of the all India cement sales. The state government, which was driving cement sales by taking up mass housing programmes, has reduced the offtake for about six months now. Similarly, monsoon too has been extremely good postponing the construction activity. The property development in general too has been sluggish in Hyderabad and also in metros like Chennai for the last one year.
As the utilisation rate is expected to be stagnant, analysts do not foresee any reason for price escalation as lower utilisation rate would make it difficult to maintain realisation rate.
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