With GST rolling over at the start of quarter of July-September 2017, the cement industry was caught off guard about the new process, but more than euphoric on the One Nation One Tax regime. Pegged under the highest slab rate of 28 per cent, the cement industry was found wobbling under the new tax regime due to the temendous paper work, added with the inconsistency in the chain’s backward and forward link. Other problems include the temporal problem fixing by the government and above all multiple rates for buying raw materials and selling final goods.
The GST rates and the processess kept tinkering in order to overcome pointed anomalies and issues relating to filing of the returns. Nevertheless, the quarter being seasonally dull for the cement industry due to low construction activity during monsoon, and with falling production volumes, the performance of most of the companies was under strain from both, the demand and the supply side. Further, points such as the avaliability of sand, the ban on the usage of petcoke and furnace oil will continue to haunt the cement companies. Nitin Madkaikar reviews the performance of cement companies during the quarter July to September 2017, only to come to a conclusion that there is long way to go under the new tax regime for all related activities to be on the same page.
Financial results of 33 large and small cement companies which represent around 50 per cent of the sales for the quarter ended September 2017 showed a growth of 12 per cent in top line in a year on year (YOY) comparison but down 16per cent sequentially (September over June). The bottom line was negative in both comparisons declining sequentially by 5.6 per cent and 42 per cent respectively. These companies are categorised into large (those with quarterly net sales of over Rs.1,000 crore), medium (those with net sales of Rs.200-1,000 crore) and small (companies with net sales of less than Rs.200 crore). The financial results of quarters ending September 2016, June 2017 and September 2017 are considered for review in this analysis.
In the previous quarter, (June 2017) the cement business had suffered due to the wholesalers and retailers reducing stocks prior to the Goods and Services Tax (GST) roll out. This quarter was mired by the implementation of the new tax regime, the GST, resulting in performance below market expectation. Nevertheless, the quarter is seasonally dull for cement business due to low construction activity during the South West monsoon.
Of the 33 companies under review, 10 companies posted declined in yoy sales (including 4 large) but QoQ decline was posted by 23 companies (including 6 large companies). So top line was down across categories and not for a particular category. Similarly, yoy net profits were down in 18 companies (including 7 large companies) while QoQ saw net profits down in 24 companies (including 8 large companies). This implies, the bottom line was adversely affected across all size of companies.
The overall profitability (Net Profit/Net Sales) was at 6.1 per cent in September 2017 quarter, down from 7.3 per cent in quarter of September 2016 and 9 per cent in quarter of June 2017. Almost all companies could manage to post positive margin excepting five companies who recorded net loss during the September 2017 quarter. Only three companies Ambuja Cements, Ramco Cements and OCL India could manage to maintain their margins across three quarters under review. 16 companies saw profitability drop below their levels a year ago while 24 companies saw profitability levels below previous quarter.
The weak performance can also be drawn from the macro factors like production. In Q1 2017-18, total cement production was down 3.3 per cent year on year (at 73 million tons) which could not revive in Q2 and fell again although marginally by 0.4 per cent (68 million tons). Thus, the first half of 2017-18 saw production fall 2 per cent compared to 5 per cent increase (in similar comparison) in the same period a year ago. The GDP growth also tapered in Q1 2017-18 to 5.7 per cent but recovered slowly to 6.3 per cent in Q2. Many GDP growth predictions for the year are revisited but mostly points towards a lower economic growth for the year.
As per the predictions of industry experts, there will be a growth in the industry at 5-6 per cent CAGR between FY’17 and FY’20 and the domestic consumption is set to out pace the supply in the next three fiscal years. In the Union Budget 2017-18, Rs 22,500 crore was allocated to achieve government’s mission of ‘Housing for All by 2022’. the housing sector alone accounts for nearly 67 per cent of the total cement consumption in India. The increased allocation to rural low-cost housing under Pradhan Mantri Awaas Yojana- Gramin scheme to Rs 23,000 crore is likely to result in a rise of 2 per cent in the cement demand.
For the year, the cement demand is expected to register a modest rise of 1 per cent in 2017-18 pushed by pick-up in affordable and rural housing and road and irrigation projects, said rating agency ICRA. As per the agency, the cement offtake was weak in first half of the year which extended into October due to factors like weak real estate activity, sand shortage and GST implementation issues. However, new project announcements from private sector will remain weak. The demand is expected to rebound in from the fourth quarter of the year as against the earlier expectation of the third quarter, the rating agency said.
Company-wise Performance Ambuja Cement
Ambuja Cement delivered strong numbers while focusing on brand building, through differentiated offerings for individual home builders, building and infrastructure segments. According to Ajay Kapur, Managing Director and CEO, the company’s strategy to focus on key markets, premium products and value based pricing has paid off, leading to strong net sales and EBITDA growth.
During July-September 2017 quarter Ambuja Cement recorded higher sales and growth in value-added pricing, but it also faced cost pressures relating to rising fuel costs, packaging and raw material prices. Thus, there has been a move to increase the use of petcoke and alternative fuels further, as against 67 per cent it achieved in June 2017. Ambuja Cement’s net sales rose 14 per cent YOY to Rs 2,320 crore even as sales volume grew slower at 11.6 per cent to 5.02 million ton. Net profits, however, moderated 2 per cent to Rs 272 crore for the quarter. EBITDA per ton rose 3 per cent to Rs 706.
UltraTech Cement reported a 28 per cent decline in net profit (in standalone) to Rs 431 crore for the quarter ended September 2017. It had clocked net profit of Rs 601 crore in the July-September 2016. The company’s net sales were up 6.1 per cent at Rs 6,571 crore during Q2 2017-18 as against Rs 6,196 crore in same quarter the year-ago.
This quarter continued to witness increasing cost trends, attributable to increase in fuel price while total expenses were up 11per cent at Rs 6,095 crore as against Rs 5,491 crore. Depreciation increased 59 per cent to Rs 499 crore while interest cost doubled to Rs 376 crore due to cost involving new cement plant acquisition. Meanwhile, EBITDA increased 24 per cent to Rs 1,350 crore, translating into EBITDA/ton of Rs 1,028 and margin of 21per cent.
The company stated that the acquisition of cement plants of Jaiprakash Associates and Jaypee Cement Corp had helped it augment capacity to 93 million ton per annum. The acquisition has also enhanced its footprint in the high growth markets of central India, eastern UP and coastal Andhra Pradesh, where the company has been focusing to increase its presence.
Ace cement maker ACC reported over two-fold increase in net profit to Rs 178 crore for the quarter ended September 2017, largely driven by increased productivity and cost optimisation. Net sales was up 24 per cent Rs 3,116 crore for the quarter under review against Rs 2,519 crore in the corresponding period a year ago.
According to the company, the strong result is the reflection of increased focus on premium products, improved customer service levels and relentlessly driving productivity and cost optimisation.
The company expect demand for cement to remain favourable in the coming quarter spurred by the government’s increased spending on infrastructure.
The company reported net sales for Q2 at Rs 2,238 crore but posted net loss of Rs 24 crore in quarter versus net profit of Rs 17 crore in the corresponding quarter of 2016-17.
The company’s volumes were impacted due to near complete sand mining ban in UP and Bihar, which together constitutes approximately 70 per cent of the sales. Further, a slowdown in the execution and new launches of real estate projects due to RERA registration of existing projects impacted volumes of tiles and ready mixed concrete segment.
Financial results of Shree Cements were a mixed set of earnings in quarter ended September 2017, as it was slightly better than the low expectations.
According to H M Bangur, Managing Director, the worst seems to be over for the cement industry -- the impact of demonetisation, GST now behind. The company expect better results in Q3 because of low base effect.
Availability of sand was a problem for the cement makers but believes to be over soon. Historically, demand for cement in Q3 is maximum, Bangur pointed out.
Shree Cement expects demand to grow 15per cent in next three years with sales volumes up 12per cent in 2017-18 for the company and able to achieve sales of 20 million tons against 18 million tons last year. However, pressure on margins will increase in transportation costs and freight costs. The freight costs have increased 17per cent YoY, at Rs 200 a ton during the quarter.
The Supreme Court’s ban on use of petcoke and furnace oil in Delhi-NCR region will not impact the company since it follows all emission standards of using Petcoke.
India Cements reported net profits of Rs 24 crore for the quarter ending September 2017 against Rs 62 crore during the same quarter previous year. Net sales during the quarter came down to Rs 1,268 crore as against Rs 1,314 crore last year. The financial numbers are not comparable with last year since sales include excise duty besides its subsidiary Trinetra Cements was merged with it.
According to N Srinivasan, Vice-Chairman and Managing Director, the ‘sluggishness’ in performance cannot be attributed alone to demonetisation introduced last year or GST or general economic slowdown, but a combination of all three factors. However, absence of freely availability of sand was also a reason. In Tamil Nadu cement volume could not rise despite the demand. He also stated that this was the first time the company witnessed a de-growth.
Although performance of OCL in the Q2 improved, it fell short of expectations as the numbers were weaker than expected. While net sales declined 3 per cent , net profit fell 8 per cent.
The company reported over two-fold increase in its net profit to Rs 93.14 crore for the quarter ended September 2017 and net sales up 3 per cent at Rs 1,108 crore in the quarter. The company, part of the US$4 billion JK Group, operates integrated cement facilities at Sirohi (Rajasthan), Durg (Chhattisgarh), Kalol and Surat (Gujarat) and Jharli (Haryana).
Birla Corporation, a large cement company, saw net profit plunge 84 per cent to Rs 4 crore on higher expenses. Net sales declined 10 per cent to Rs 797 crore in the September quarter compared to Rs 887 crore in the year-ago period. Total expenses increased 17.6 per cent in Q2 while finance cost almost doubled to Rs 105 crore during the quarter under review.