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Cement stocks: Analysts see capacity additions to put pressure on prices

Suresh P. Iyengar

Mumbai, Aug. 6 : There seems to be few takers for cement company stocks in the bourses despite the manufacturers posting higher profits in the June quarter this year. Analysts feel that the additional capacities, being added across the country, will exert downward pressure on cement prices.

“We believe 70 million tonnes of fresh capacity is expected to be commissioned over the next 24-30 months. The capacity addition would disturb the demand-supply equation and weaken the pricing power of cement producers,” said Mr Ajit Motwani, research analyst, Emkay Share and Stock Broking Ltd. “We foresee cement stocks, in the long run, to under-perform as the bunching up of capacities would take its toll on cement prices, thereby affecting profitability of cement manufacturers,” he added.

Cement companies, however, are betting on substantial increase in demand to hold prices at the current level.

Commenting on the future trend of the industry at UltraTech annual general meeting, Mr Kumar Mangalam Birla, Chairman, said: “An addition capacity of 90 million tonnes is likely to be commissioned over the next three years and could result in a surplus scenario, thereby putting pressure on domestic prices from the middle of FY ’09.

However, the demand for cement is expected to grow around 10 per cent linked to GDP growth and the Government’s continued initiatives for infrastructure development augur well for the industry in the long run.”

Companies have managed to overcome the high raw material cost in Q1 of FY ’08 by better price realisations.

Even though ACC’s operating profit for the quarter grew by 19.5 per cent to Rs 544 crore, the operating profit margins fell by 200 bps (basis points), basically because of high production cost, which increased by almost 14 per cent to Rs 2,478 per tonne.

Production cost for UltraTech increased 15.1 per cent y-o-y to Rs 2,084 per tonne as raw material cost rose by 28.6 per cent to Rs 262.80, freight cost by 11 per cent to Rs 616, and other expenditure by 26 per cent to Rs 397.

The future for cement companies seems bleak with additional capacities coming on stream.

Price realisations for the FY’08 first quarter, compared on a sequential basis, are almost flat reflecting that companies have not resorted to substantive increases.

Moreover, the prices in many States are hovering at an all-time high, leaving little scope for further revision.

Capacity addition

ACC has completed its capacity expansion at Lakheri (in Rajasthan) by adding 0.90 million tonnes per annum to 1.50 mtpa along with a new 25 MW captive power plant. It has augmented the grinding capacity at Kymore in Madhya Pradesh to 1.70 mtpa. The company has also enhanced the grinding capacity at Tikaria in Uttar Pradesh to 2 mtpa.

Binani Cement has added 2.25 million tonnes per annum to its existing capacity of 2.75 mtpa in Udaipur, Rajasthan.