The Cracks Are Showing

The cement sector is feeling the pinch of a slowdown in sales growth as well as shrinking profits.While small and medium companies have reported higher topline growth than large firms, they have fared poorly in terms of net profit SH I KHA SHAR MA ET INTELLIGENCE GROU P  THE CEMENT sector is facing a double whammy. At a time when India Inc is reporting robust demand, cement producers are feeling the pinch of a slowdown in sales growth as well as shrinking profits.      A slowdown in construction activity has affected the revenue growth of cement companies, while escalating fuel prices and distribution costs have affected their earnings. Net sales of the top 32 cement producers grew by a modest 11% year-onyear to Rs 9,680 crore in the June '08 quarter, against 23% growth reported during the corresponding quarter last year. Significantly, companies could not capitalise on the improvement in realisations, as cement prices increased marginally by 3% in the previous quarter.      On the cost front, raw material cost rose 28%, much higher than revenue growth, thereby affecting companies' operating margins. Power and fuel cost jumped 39% during the June '08 quarter, against a mere 11% growth in the June '07 quarter. Similarly, freight and other distribution expenses — which are a key cost component, accounting for 15% of sales — increased by 12% to Rs 1,425 crore. With a sharp rise in operating cost, the cement industry's operating margin declined nearly 600 basis points during the quarter.      Among non-operating cost heads, interest cost registered a sharp increase of 24% in Q1 FY09, against a decline in interest component during Q1 FY08, while depreciation provision rose by 30%, against just 6% growth in the same quarter last fiscal year. With sales growth moderating and both operating and other cost components recording high growth, cement companies' net profit shrunk by as much as 21%. This is in sharp contrast to the 21% growth in profit seen during Q1 FY08.      While cement producers' financials have  been affected, their operational efficiencies have also reduced. The industry, which has been operating with high capacity utilisation over the past few years, witnessed a decline in utilisation rate, from 91% in July '07 to 86% currently. This is partly due to commissioning of fresh capacities.      According to industry reports, there was an 8% increase in total installed capacity during the June '08 quarter. Among the major players, Ambuja Cements has increased its capacity by 15% to 4.4 million tonnes (mt).      For the industry as a whole, production rose to 46 mt in Q1 FY09, compared to 42 mt in the same quarter last year, despite the decline in capacity utilisation. With more capacity expected to be commissioned in the near future, there's likely to be a glut in the market. According to CMIE data, the value of all the projects, which have either been announced or are under implementation, is around Rs 40,000 crore.      If we compare small, medium and large companies, an interesting trend emerges. Small and medium-sized companies performed better in terms of topline growth, compared to the industry heavyweights. However, these companies fared poorly in terms of net profit due to inefficient cost management.      Large companies — having revenues of more than Rs 1,500 crore for the June '08 quarter — reported a 4% growth in sales, against 28% growth for medium-sized companies, which had sales of Rs 500-1,400 crore. While smaller companies generated healthy double-digit sales growth of 13%, their bottomlines bore the brunt of cost pressure. The profit of small companies declined by 24%, while that of mid-sized cement producers fell 8%.      Going forward, prices are expected to soften due to an increase in the supply of cement. Further, strong regional players such as Shree Cement, Madras Cement, Jaypee and JK Cement, among others, are better placed due to their proximity to raw materials and strong local markets.      shikha.sharma1@timesgroup.com

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