Cement’s cracking up — price, profitability & all

The cement industry, grappling with high input costs and a demand-supply mismatch, may be looking at one of the gloomiest periods in recent recall, going by some experts.

Ambit Capital analysts Nitin Bhasin and Ritu Modi have lowered expectations for cement volumes growth in FY12 to around 3.5%, much lower than the 5% growth witnessed in FY11, which was already a decadal low. The projection is also lower than an industry expectation of 5% and certain analyst expectations of around 7-8% growth.

The Ambit duo explained the low estimation. “The report noted cement volume growth is more correlated to gross fixed capital formation (GFCF) growth than GDP growth. Rising risks to near-term low GFCF growth (est. 5.5% for FY12 v/s 8.6% for FY11) will lower cement volume growth to ~3.5% in FY12 after a decadal low of ~5% in FY11,” they wrote in a report released on Wednesday.

Crisil Research has noted that profitability of cement companies could also turn out to be the lowest in a decade. In a note released on Wednesday, it said operating rates, or capacity utilisation, for cement companies would fall further from 78% in 2010-11 to around 72% in 2012-13.

With demand weak and input costs high, profitability of cement players is bound to fall, it said.

“The magnitude of the demand-supply imbalance and cost escalation will halve the cement industry’s Ebitda (earnings before interest, tax, depreciation and amortisation) margins from the current 20% to around 10% in 2012-13 — the lowest level in the past 10 years,” Prasad Koparkar, head -

industry and customised research, Crisil Research wrote in the note.   

Input costs for cement companies have increased significantly in the past one year.

The average cost has increased 27% for coal, 16% for power and close to 20% for captive power. Costs of other vital raw materials such as slag and limestone have also increased 11-12%.

Crisil expects power and fuel costs to increase further this year, by as much as 18%.

Meanwhile, both return on capital employed (ROCE) and Ebitda margins are trending down for the industry.

The average industry ROCE has fallen from 15% for FY10 to 9% in FY11, which is also lower than a three-average of 17% for the FY07-10 period.

Industry Ebitda figures have fallen from 31% in FY10 to 22% in FY11, while the three-year average Ebitda margins for FY07-10 were at 31%.

Cement companies have not been able to arrest the decline in cement prices in view of the low volume growth and high input costs.

Averaged all-India cement prices have fallen around Rs5 per bag month on month, Ajit Motwani and Chandan Asrani wrote in an Emkay Global research note released on Tuesday.

Region-wise, northern and central markets have suffered a major decline in cement prices.

But things may not get worse from here, particularly in terms of capacity utilisation and volume growth, feel some analysts.

“We expect volumes to grow at around 8% for FY12 and do not see capacity utilisation levels falling further; it might improve from here,” said an analyst from a domestic brokerage house who did not wished to be named.

Another analyst from a foreign brokerage reiterated the 8% growth rate expectation. “The growth rate expectation is based on two factors —- capacity added in FY11 would stabilise this year and secondly, that it is also a low base effect, given that we witnessed just 5% growth last year.”