September quarter numbers from cement manufacturers have been better than expected. UltraTech Cement managed a 140 per cent growth in net profits. Holcim group companies ACC and Ambuja Cements made a 67 per cent and 13 per cent increase in net profits respectively. Despatches as well as realisations were higher for the three companies on a year-on-year comparison. Higher realisation helped them combat pressure from input costs and they recorded improved profit margins too. The robust profit growth is, however, thanks to a low base effect, as profits were under pressure last year. In July-September quarter of 2010, the three companies saw a 50-80 per cent drop in net profits.

The cement industry reported a despatches growth of around five per cent in the July-September period on top of a 3.5 per cent growth in the same period last year. Prices were around Rs 260/bag, up from Rs 225-230/bag in the September quarter last year.

What drove despatches?

Both ACC and Ambuja Cements reported a higher-than-industry growth in despatches. ACC's growth (19 per cent up to 5.61 million tonnes) was however more pronounced than Ambuja Cement and UltraTech. In the same period last year, the company was constrained by capacity and reported a lower growth than peers. ACC added around six million tonnes of grinding capacity in December quarter last year and has clearly regained some of its lost market share. Ambuja Cements reported a despatches growth of six per cent. UltraTech Cement made a 2.6 per cent growth in despatches in the September 2011 quarter on revival in demand in parts of northern India. In south, though the State of Andhra Pradesh didn't show much revival, demand picked up in Tamil Nadu.

Margin picture- mixed

Though all key inputs (thermal coal was quoting at around $123/tonne in Newcastle, Australia, up 30 per cent y-o-y) were ruling at much higher levels than last year, ACC and UltraTech Cement managed to improve their profit margins. This is largely due to the improved realisations. UltraTech Cement recorded the steepest margin increase of close to three percentage points to 16.7 per cent. Its exposure to southern markets has helped with prices at Rs 305/bag in the September quarter vs. Rs 220/bag last year. ACC too managed better margins, but Ambuja Cements reported a decline. This company doesn't have exposure to southern market.

Outlook

The base effect on prices will start waning from the December quarter and it may be a challenge for cement companies to hold on to profit margins. With the coal ministry diverting more coal supplies to power companies, there is shortage of coal for cement manufacturers. Higher import of coal by these players may escalate costs. Freight expenses too are on the rise. Recently commissioned capacity operating at low utilisation too may pressure profit margins.

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