Sector review: North and central India push up cement volume growth; south subdued

Cement sector performance in the quarter ended 30 June 2014 (Q1FY15) has seen mixed results.

While volume growth for southern cement producers remained subdued, those in the north, central and western region drove the volume growth above 12 per cent. JK Lakshmi Cement, Sanghi Industries, Mangalam Cement and Saurashtra Cements have outperformed the sector with 30-per cent volume growth.

Margins continue to be below on a year-on-year basis, largely led by weak profitability for the southern region cement firms.

Prices improved from mid-June in the southern region but declined in other regions due to the monsoon. Most companies reported higher-than-expected costs primarily due to increase in pet coke and diesel prices.

Operating margins fell for the fourth consecutive quarters in a row, but the fall was moderate at about 84 basis points compared to the sharp 300-900 basis points fall in the previous three quarters. Volume growth and strong uptick in price realisation arrested the fall in margin, which was impacted by a rise in rail freight and fuel costs.

Net profit grew by over 15 per cent due to a strong show by Ambuja Cement, turnaround by Prism Cement and robust performance from Birla, Corporation and JK Lakshmi Cement.

ACC, India Cement, Ramco Cement and UltraTech reported a decline in their Q1FY15 net profit.

Moving forward from the first quarter results, the cement sector is likely to continue to face price volatility, as capacity utilizations will stay in check even if demand growth were to accelerate to double digits, says cement analyst at Kotak Securities. Besides, over FY2015-17, the industry will augment capacity by 56 million tons (Industry estimate).

Kotak Securities' latest research report indicates of an addition of 56 million tons cement capacity over the next three years with 11 million tons in the northern region and 16 million tons in the central region adding to the supply glut seen in South India (20 million tons).

Western India is the preferred market with minimal capacity addition (5 million tons) and industry utilisation likely to step up to over 90 per cent after being subdued over the past few years.

According to a CLSA cement industry report dated 1 September 2014, strong recovery is expected in cement demand. Indian cement production rose by 16.5 per cent year-on-year in July 2014, which was strongest growth in the past 32 months. With this, April-July 2014 production growth now stands at 11 per cent year-on-year.

Analyst says that cement players have expressed surprise at the strong trend considering infrastructure projects are yet to take off in a meaningful manner. The recent channel checks indicated some moderation in cement demand as monsoons picked up in August.

Data source: Capitaline +

* Y-o-Y basis points change in RM/ sales and operating margin