Market sees bad Q1 for cement
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July 8: Cement firms are expected to post a poor set of numbers compared to the broader market. The 9 per cent increase in sales volume during the quarter has been offset by the falling prices. Market watchers say that the drop in prices is sharper in the South, and particularly so in Andhra Pradesh. Grasim and Ultratech seem to be the favorite companies with analysts.
Views are mixed on India Cements. Some brokers say ‘avoid’ because poor results are expected, while a few others cite a poor valuation as the reason for a ‘buy’. Cement offtake was robust during the first half of Q1, says Mumbai based brokerage Edelweiss.
There was also a shortage of railway wagons in the period, which meant cement could not be moved from region to next. However, prices dropped by as much as Rs 5-35/bag in the second half of the quarter, more than the earlier increase. The brokerage expects margins of cement companies to fall by 0.5-3 per cent versus the last year. India Cement is going to be hit harder than other big players because of its concentration in the South, the broker says. Compared to the last year, the sharpest drop in cement prices is expected in the South, says IIFL. On the cost side too, there are pressures. Coal prices have risen over 50 per cent in the past year, and there have been two rounds of increases in diesel prices.
Coal is a fuel used in cement manufacture while diesel prices matter because a lot of cement is moved on roads. The next 6-9 months are also expected to see high volatility in cement prices, according to Motilal Oswal. The brokerage says that seasonality of demand —because of rains, and new capacity would keep prices moving sharply. Over a longer period, the broker foresees a slowdown in new capacity addition. Only about 38 million tons of new capacity is expected to be added in next 18 months, the brokerage says, versus 66 million tons in the past 18 months. This should help reduce overcapacity in the sector.
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