MINT Friday, March 4, 2011 “Double whammy for cement companies rust when things were ig better for cement firms, with a slight Increase in despatches and prices, their for- ‘umes seem to be hit again, this time on two counts simulta neously. No sooner had Goal In- dia Ltd (CIL}, the single largest ‘domestic supplier of coal to c2- ‘ment units, hiked prices by neatly 30%, than did the Budget 2011 single out the already ‘beleaguered cement sector with ‘42% lke in excise duty. The double whammy vould, un- doubtedly, eat into the proft- ability of eement firms. “The sector has fared badly in the last four quarters, wit fall- ing realizations and profits. Ce- ‘mont shares were, therefore, lag- igards. Buta gradual pick-up in ‘demand, mainly from the realty sector since December, led to price expansion of an average of 350-40 per bag across the coun- tay, February despatch data was refreshing, with firms such as ACC Ltd, Ambuja Cements Lid and UltraTech Cement Ltd reg- Istering year-on-year growth “Most analysts believed thatthe sector had bottomed out. Ear- ings Were expected to improve atleast for the noxt two quarters. ‘But the steep hike in the price of coal isan impediment be- ‘cause the coment industry gets nearly half ofits coal require ‘ments from domestic coat imines. The rest comes from international and spot markets. ‘The international coal price had surged to $115 (85,175 on. ‘Thursday per tonne from $90 at the beginning of fiscal 2011, ‘Asenior official at India ‘Cements Lid contirming an ap- proximate 2650 per tonne hike ‘on the earlier price of 22,300 per tonne (about 28.3%) adds that it ‘would lead to cost pressures. ‘Against a backdrop of rela: ‘uvely low capacity uiization at {65-70% cement firms do not even have the operating lever- ‘age to offset these cost pres- sures. An Emlcay Global Finan- lal Services Led report says, “We estimate power and fuel cost for the industry to go up to be 6.5% higher than the Q32YL1 (quarter ended December) Ievels” Of course, the magnitude of the impact on individual firm's roftabilty would also depend ‘on the percentage of coal it pro- cures ftom GIL. Analysts’ con- sensus points towards ACC, Am- | Duja and UlraTech being the | worst hit by the rise (see chart). {As ifthis wasn't enough, finance minister Pranab | ‘Mukherjee has imposed a 10% ad valorem dy plus 2160 per tonne on cement bags above "2190 perbag (ex-woris). Indus- | try says they will pay €4-8 per bag mare than before on account of excise. ‘These twin pressures warrant an increase in the selling price of at least 28-10 per bag to be able to maintain profitably at feurrent levels. That might have been a possibility ifthe sector was booming like the auto in- dustry. Given surplus capacity land recent price hikes, itmay be Jhard for firms to pass on all ‘costs to consumers. This implies addidional pressure on mar- ‘gins—cement firms’ costs jumped neatly 12-15% in the December quarter on the back of higher fuel, freight and ‘material costs. “The only ray of hope would be demand growth. That too was at ‘alow 6-7% for the first nine ‘months of fiscal 2011. ‘To sum up, while cement prices are expected to hold at current levels, at least untl the ‘monsoon sets in, a sustained recovery in profit margin is stl toa ‘arsalacouar al