BW Communities

Losing Their Hold

Nevin John Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[July shouldn't be a flash in the pan — that is what India's cement companies are praying for after witnessing a spurt in sales last month. The first three months of this fiscal (April-June 2011) were not encouraging — at less than 5 per cent, the industry posted the lowest growth in over a decade. The pressure is mainly on three fronts: increasing input costs, slackening demand and surplus capacity. In July, Swiss major Holcim outperformed the industry in sales volume. ACC and Ambuja Cements, controlled by Holcim, saw 28 per cent and 14 per cent growth, respectively, compared to the same period last year. Aditya Birla Group-controlled UltraTech's sales volume went up 7.4 per cent, while JP Associates' rose 19 per cent. Analysts say heavy monsoons last year slowed down demand, but the conditions were better this July. And companies are hoping for more. "The government has not released any major orders. Real estate and retail business, which essentially boosts the cement demand, is not seeing any recovery," says a Mumbai-based analyst. After announcing the June-quarter results, ACC and Ambuja blamed higher prices of raw materials such as coal, diesel, freight, flyash, gypsum and power for the drop in profitability. UltraTech said the quarter was affected by the 30 per cent increase in domestic coal prices in March 2011. Moreover, prices of imported coal, too, rose by 30 per cent, resulting in a substantial escalation in costs. <a href="/businessworld/system/files/cement-graphic-pu.gif" onclick="window.open('','','');return false;"><img src="/businessworld/system/files/cement-graphic300x185.gif" style="float: right; margin: 5px;" width="300" height="185"></a>Coal accounts for nearly one-third of a cement maker's costs. ACC's dependence on import and auction is 40-45 per cent, while Ambuja's is 55 per cent. With 65 per cent, UltraTech's exposure to coal import and auction is the highest. In terms of power supply, too, the cement companies (which depend on power supplied from the central grid) are facing increased input costs. Many are now setting up captive power plants to address this issue. Another increased expense has been for transportation because of non-availability of wagons and vessels. Ambuja Cements managing director Onne van der Weijde recently said the company would continue to take measures to improve productivity and operational efficiency to partly mitigate the pressures. The same holds true for other cement companies as well. According to Motilal Oswal Securities, capacity utilisation declined to about 74 per cent in the June-quarter compared to 80 per cent in the quarter ended March. The infrastructure companies expect the government to award more projects after the extended monsoon across the country. However, the realisation on sales, say analysts, will be delayed by about six months even if the projects are awarded now. Some blame the companies' capacity additions for the dire situation. Macquarie Equities Research sees at least a two-year wait for a bull cycle in cement to return to India, the world's second largest cement producer after China. UltraTech executives admit that the surplus scenario is likely to continue over the next 2-3 years, which will result in the selling prices remaining under pressure. Moreover, if the global economic slowdown impacts India, it will worsen the bad phase that the cement sector is going through. Companies are keeping their fingers crossed. (This story was published in Businessworld Issue Dated 22-08-2011)