Lower sales hit cement majors’ profits in March quarter

In the latest quarter ended March 31, 2013, cement majors saw flagging prices and shrinking profit margins, triggering a sharp fall in profits.

UltraTech Cement reported a 16 per cent drop in net profit. The Holcim group companies — ACC and Ambuja Cement reported profit growth due to tax write-backs and depreciation adjustments. Profits before these one-offs declined by 18 per cent, year-on-year.

January to March is usually the busiest time of the year for construction activities.

But cement demand remained muted this time around. ACC, Ambuja Cement and Shree Cement saw sales volumes decline by 4-6 per cent.

For UltraTech, despatches were flat over last year.

Muted order flows from government infrastructure projects, shortage of sand and bricks in the North and Central pockets of the country and water problems of the West were reasons for the slowing construction activity which led to the fall in cement offtake.

And as demand weakened, cement prices too, corrected. The all-India average cement price was Rs 280 a bag this quarter, down from Rs 290 a bag in the same time last year.

Cost pressure

 Cement players did not benefit much from the fall in coal and pet coke prices, their key inputs, in the international market.

A significant chunk of the savings was wiped out by the weaker rupee. Inputs such as limestone and freight also added to costs.

Freight costs increased by eight per cent to 10 per cent over a year earlier on higher diesel prices.

Raw material costs as a percentage of sales rose to an average of 13 per cent, up from 11 per cent a year ago.

Operating profit margin thus, narrowed by five percentage points to an average of 20 per cent for ACC, Ambuja Cements and UltraTech Cement. Shree Cement, however, saw margin expansion, thanks to lower power costs.

 From here, despatches growth may hold the key to revival in profits. In 2012-13, cement demand increased by around 5.5 per cent only, despite a low base.

With the Government likely to award 3,000 km of road projects in the first six months of 2013-14 and measures to support affordable housing, demand could receive support.

One bright spot for the sector is that the pace of capacity additions is slowing.

This may help improve capacity utilisation rates provided demand begins to improve.