STOCK WATCH. Cost benefits act as the driving force for cement players

The year so far has been a mixed bag for the cement players. All India cement prices remained flat — except the northern region which saw about 20 per cent growth. Also, the cement volumes continued to remain below its long-term averages in many regions — with the expectation that it would finish with a below-normal growth of 3 per cent in FY17 (thanks to demonetisation).

However for the listed cement companies, sales were up 14.1 per cent on a y-o-y basis for the six months ending September 2016, while net profit was up 73 per cent. The top four cement companies managed to improve their net profit by 20 per cent or more during the period.

For the market leader UltraTech Cement, sales were up by a mere 0.2 per cent for the nine months ended December 2016 as compared to 20 per cent growth in net profit. UltraTech Cement recently came out with the December quarter results. For ACC, sales were down 6.3 per cent for the six-month period ending September 2016, while profit was up 31 per cent. Ambuja Cements’ figures were not comparable, because of the amalgamation of Holcim with the company during the year.

Lower power and fuel costs as well as that of freight remained the biggest triggers for improvement in profits for the cement companies during the year. Many of the companies had substituted coal for petcoke, with the price of the latter remaining lower during the period. Also, with diesel prices hovering lower, savings was possible in freight and forwarding.

In short, the cement players managed to put up a good performance — largely from cost savings rather than from a pick-up in demand for cement. The stock market rewarded the cement stocks with average appreciation of 47 per cent in the last one year. However, it was the stocks of mid-sized companies — especially those quoting at a relatively lower valuation metric — that saw the maximum appreciation. While Dalmia Bharat was up 152 per cent, Ramco Cement was up 72 per cent and Birla Corporation by 81 per cent, large cap stocks like UltraTech Cement (34 per cent), Ambuja Cements (16 per cent) and ACC(13 per cent) saw a decent appreciation.

Going forward, with the advent of demonetisation, the next two quarters are likely to witness negative volume growth. It will also delay the demand recovery for the sector by another six months. Moreover, with petcoke prices more than doubling since March 2016, most of the cost advantages from changing the fuel mix have been erased.

Many regional players have scaled up operations in recent times — in the process adding to debt. With volume growth remaining poor in the last three years, these players face the challenge of servicing debt-related payments, if the demand doesn’t pick up. Rural housing (40 per cent), urban housing (25 per cent) and infrastructure (20 per cent) are major demand drivers for the cement industry. While roads and railways have in the past witnessed increased Budget allocations from the government — boosting infrastructure-related demand, it will be important to see if Budget 2016-17 gives a further impetus to rural income and housing-based individual tax incentives.