Cement Sector Likely To Witness Another Subdued Quarter

The cement sector had not fared too well in the last quarter of FY13. The weak sector internals were clearly reflected by the sector’s dismal topline performance in the quarter. The revenue growth for companies in the sector remained subdued, with an increase of 1% on a YoY basis as against the street expectation of around 4%. The volumes in the sector fell for the second consecutive quarter. For Q4FY13, the volumes slid by 2.6% as against an expected decline of 0.8% to 1% on a YoY basis. The average EBITDA/t for the sector declined by 16% on a yearly basis to Rs 880/tonne. This too was lower than the street estimate of Rs 950/tonne.

Let us now take a look at how the sector’s likely performance for the first quarter of FY14. Cement prices witnessed a bounce-back in the month of May 2013 after two consecutive months of decline. On a pan India basis, they increased by Rs 15 per bag in this month. However, this was a repercussion of the increase in coal prices and an earlier hike in railway freight charges. Cement producers passed on these cost hikes to their consumer and tried to regain some pricing discipline. According to the available data, cement prices have declined from Rs 295 per bag in Q1FY13 to Rs 289 per bag in Q1FY14 on a YoY basis. These price hikes are not likely to help the sector considering that the volumes still remain sluggish and are not expected to improve in the near term. The arrival of the monsoons is one reason why the demand for cement remains subdued.

The realisations in the cement sector are also not expected to improve going forward. With a sluggish demand, the street is expecting volumes growth of around 3% on a YoY basis. Price hikes by Coal India (effective June 1, 2013) and sharp currency depreciation may offset the benefits of softer imported coal prices. Some improvement in the cement sector can be seen only from the second half of the present fiscal. Until then, the performance of the sector will possibly remain low. But companies having a strong presence in the southern part of the country may fare well as compared to those located in the northern parts as the demand in the southern region looks stronger as compared to that of in northern India.