Cement Companies' Results: India Profit League under attack
The annual numbers of cement companies have turned out to be a mixed bag, with the industry leaders putting up an impressive performance while the medium and smaller players reeling under the onslaught of multiple odds stacked up against the industry. Prakash Patil analyses the results and assesses the prospects of the industry going forward.
On the cricket grounds, the Indian Premier League (IPL) season is now in full swing, while on the corporate front, the Indian Profit League's (IPL) results season is full on. The heavyweights among Indian cement companies have showcased their performance and Chennai Super Kings' owner India Cements' N Srinivasan has reasons to smile. Both his company's financial performance during 2011-12 as well as his IPL team's performance on the ground has been above average.
The financial performance of leading Indian cement companies for FY12 or CY11 has been a mixed bag. While some of the cement majors such as Ultratech, ACC, and India Cement have posted excellent financial numbers, other majors such as Ambuja Cement, Binani, Birla Corp, Jayprakash Associates, among others, have not put up very encouraging performance. The top six companies command over 50 per cent of the market share in India, hence a look at their performance would be indicative of the performance of the cement sector as a whole during 2011-12. Their performance becomes all the more remarkable in the light of the fact that adverse market conditions have impacted their margins. As per the information furnished by Cement Manufacturers Association, the growth in cement demand marginally improved to 6.6 per cent in 2011-12 as against 4.7 per cent in the previous year. In fact, during the last quarter of FY12, the demand had moved up by an impressive 10 per cent as compared to 5.6 per cent in the previous nine months. More importantly, the demand in the southern region improved by 9.4 per cent in the last quarter as against the negative growth of three per cent during first nine months of the fiscal. The northern and western regions have seen the highest jump in demand due to higher infrastructure and construction activity. Cement sales increased in Gujarat on the back of increased government spending on infrastructure to complete various major projects. The capacity utilization of the industry was at 75 per cent, with the utilization in the north being highest at 86 per cent and lowest in the south at only 63 per cent.
Ultratech Cement, the largest player and the market leader, has led from the front, registering excellent growth of 17.91 per cent in its operating income, up from Rs 15,406.12 crore in FY2010-11 to Rs 18,166.38 crore in 2011-12. More impressive was its operating profit at Rs 3616.73 crore, which recorded a growth of more than 40 per cent over the previous fiscal's Rs 2,575.66 crore. ACC, the no. 2 player, saw a robust growth of 22.30 per cent in its topline at Rs 9,438.66 crore for CY2011 over the previous year's Rs 7,717.32 crore. However, its operating profit at Rs 1,445.42 crore almost remained flat registering a nominal growth of 1.80 per cent over previous year's Rs 1419.75 crore, indicating that the rise in fuel and other costs had adversely impacted its margins. Its growth in net profit by over 18 per cent was on account of other income.
Ambuja Cement too was impacted by the rising costs as both its operating as well as net profit declined by about one per cent and 2.75 per cent respectively in CY2011 as compared to CY2010, despite the fact that the operating income recorded a decent growth of over 15 per cent during the same period. Birla Corp's operating income recorded minor rise of 6.66 per cent from Rs 1908.50 crore in FY2011-12 to Rs 2035.63 crore in 2010-11, but its operating profit fell sharply from Rs 330.73 crore to Rs 208.52 crore during the same period. Binani Cement has recorded decent operating income and operating profit, but its net profit has declined drastically. While its operating income went up 17.35 per cent from Rs 1720.54 crore in FY2010-11 to Rs 2019.05 crore in FY2011-12, its net profit plummeted 46.52 per cent to Rs 48.40 crore from Rs 90.51 crore during the same period.
In sharp contrast to the northern players, the southern cement majors India Cement and Madras Cement have put up a sterling performance. While India Cement's operating income recorded modest growth of 19.3 per cent, up from Rs 3,540 crore in FY2010-11 to Rs 4223 crore in FY2011-12, its operating profit and net profit recorded a spectacular growth. Its operating profit jumped from Rs 473 crore in FY2010-11 to Rs 923 crore in 2011-12, while its net profit more than quadrupled from a dismal Rs 68 crore to an impressive Rs 293 crore during the same period. So, how did India Cements achieve such superb numbers? Its impressive performance was due to higher realisations and sustained efforts on the part of the company to reduce costs through "better blending and operating parameters". The company's superb performance becomes all the more commendable despite the flat demand growth in south and capacity additions in the region forcing lesser capacity utilization. India Cements capacity utilisation at 67 per cent was higher than the southern average of 63 per cent but much lower than the all-India average of 75 per cent.
Madras Cement's annual results are not yet out, but its nine-month results give a clear indication of good tidings. While its operating income recorded excellent growth of 21.15 per cent from Rs 1918.51 crore during April-Dec. 2010 to Rs 2324.21 crore during Apr-Dec 2011, its operating profits shot up by 81.85 per cent from Rs 299.57 crore to Rs 544.76 crore during the same period. Its net profit too skyrocketed 94.30 per cent from Rs 147.20 crore to Rs 286.02 crore during the same period. In fact, Madras Cement's nine-month operating profit exceeds FY2010-11 profit of Rs 427.80 and its 9-month net profit exceeds FY2010-11 profit of Rs 210.98 crore!
However, north-based major Jaiprakash's nine-month numbers are not as inspiring. Although its topline has increased 17 per cent from Rs 3,887.30 crore during Apr-Dec 2010 to Rs 4,548.43 crore during April-Dec 2011, its operating profit has declined sharply by 45.79 per cent from Rs 616.75 crore to Rs 334.31 crore during the same period.
Of course, nine-month performances of Madras Cement, Jaiprakash or other companies whose fiscal year end in March may not reflect the actual performance for the year. The reason is that cyclically the demand situation for cement is fairly better during March quarter which also remains the best quarter in any fiscal year. This is due to the highest pick-up seen in the infrastructure and construction activities. This cyclical trend has been reflected in the despatch numbers of major cement companies like Ultratech, ACC and Ambuja Cement. Once monsoon begins in the June quarter, sluggishness is witnessed in the overall demand for cement due to lower construction activity.
The industry scenario
India is the second-largest cement market in the world, accounting for 7-8 per cent of global cement production and exports cement to more than 30 countries. However, the per capita consumption of cement in India is just around 170 kg, which is very low in comparison to the global average consumption of about 430 kg. The cement industry in India is experiencing a boom on account of overall growth of the Indian economy. The demand for cement depends mainly on the industrial activities, real estate business, construction activities and investment in the infrastructure sector. India is experiencing growth in all these areas and hence the cement market is moving ahead in spite of the world-wide economic recession. The initiatives taken by the Government of India for various infrastructure projects, road network and housing activities will provide the required stimulus to the growth of cement industry in India.
The domestic consumption of cement has been growing at a CAGR of around 10 per cent since 2008. The consumption growth has been highest in the eastern region which is clocking CAGR of 14 per cent, followed by central region where consumption grew at a CAGR of 12 per cent during the same period. Cement consumption in both west and north regions grew at a CAGR of about 9 per cent, while south lagged behind with a CAGR of 7 per cent. The regional mismatch in capacity addition has led to skewed inter-regional movement of cement. The surplus north and south regions are the leading suppliers of cement and, as a result, the east, west and central regions face a deficit of cement, thus compelling purchases from the north and south. The south is the main supplier to the west, while the north is the main supplier to the central region and eastern regions.
During CY11, the cement industry added about 20 million tonnes (mt) of capacity, taking the effective capacity for the year to about 300 mt. Cement despatches (excluding exports) increased from 205 mt during CY10 to 216 mt during CY11 registering a growth of 5.3 per cent. The increase in despatches was primarily contributed by western region (17 per cent) which was partially off-set by decrease in southern region (5 per cent) despatches.
During the last quarter of FY2011-12, the cement companies hiked the cement price by an average of Rs 20-25 per 50 kg bag which resulted in higher realisations, up by 10.2 per cent to Rs 4,744 per tonne. Currently, the all-India average price of cement is ruling at an all-time high of Rs 300 per 50 kg bag. The hike in the cement prices was due to a pick-up in demand from the infrastructure and construction industry and due to a hike in the freight cost which was partially passed on to the customers.
The concerns dogging the cement companies are aplenty. The main reasons for the dip in the margins of most of the cement companies were sharp rise in input costs of raw materials (up by 17 per cent YoY) without any significant increase in realizations, rise in prices of power and fuel (up by 23 per cent YoY) and an increase in the freight charges (up by 14 per cent YoY). Further, excess capacities especially in the southern region are a cause for worry for the cement companies in the coming year.
The rise in coal prices and power tariffs have been eroding margins of cement companies. Coal prices increased in the range of 30 per cent to 150 per cent for various grades. That apart, shortage of coal caused by the strike at Singareni Collieries Company, excessive monsoon in eastern and central India and the labour strike at Coal India and its subsidiaries severely impacted the coal production. The shortage of domestic coal forced many power plants to throttle power generation directly reducing the fly ash availability for cement companies which necessitated incorporation of more clinker for manufacturing portland pozzolana cement which resulted in erosion in their margins. The power tariffs increased because of increase in coal prices, while the freight cost for transportation increased as a result of increase in diesel price and rail tariffs.
The poor quality and unavailability of gypsum locally forced cement companies to import gypsum, which had to be bought at a higher cost due to the weakening of the rupee against the greenback. The significant increases in the prices of petcoke, slag and bags were a drag on the companies' bottomlines. Last, but not the least, the probe by Competition Commission of India on the cartelization of cement industry is making the cement companies jittery and causing a negative impact on the industry.
The road ahead
The cement industry is likely to grow by over 8 per cent riding on the government's focus on infrastructure development. The surplus scenario is likely to continue for the next three years. While capacity utilisation in southern India is likely to remain low due to high capacity additions, given the current profitability and return ratios for the new projects, it is expected that announcements for new capacity additions will decrease, slowing down capacity additions beyond 2015. This will improve capacity utilisation and also bridge the demand-supply gap. On the other hand, rising input costs and high freight charges will result in margin erosion for these companies. It is anticipated that interest rates and inflation would soften and revive the demand for home loans by individuals.
According to a report by research firm RNCOS, it is anticipated that the cement companies will continue to increase their annual cement output in coming years and the country's cement production will grow at a compound annual growth rate (CAGR) of around 12 per cent between 2011-12 and 2013-14 to reach 303 mtpa. The government of India has taken a number of initiatives to accelerate infrastructure development in the country which is bound to increase demand for cement manifold. The government is likely to speed up economic reforms and investments in infrastructure sector and also focus on rural housing and development to accelerate GDP growth. In a bid to attract foreign investors to its ambitious highways building programme, the Ministry of Road Transport plans to roll out projects worth US$ 120 billion by 2016. The infrastructure sector has received an impetus in the form of improved funds and tax related incentives offered to attract investors for tapping the infrastructure opportunities in India. Introduction of tax free bonds, formation of infrastructure debt funds and formulating a comprehensive policy for developing public private partnership projects (PPPs) are some of the steps that will provide required stimulus for growth.
Prime Minister Manmohan Singh's Economic Advisory Council has projected a GDP growth of 7.5-8 per cent for the year 2012-13 which implies a similar growth in the demand for cement. With the industrial sector showing signs of revival in the last quarter of FY2011-12 and given the government's intention to boost agricultural development and give a fillip to industrial growth, the projected growth in GDP could well be achievable. The recent proposal of the Reserve Bank of India in its credit policy to reduce the repo rates by 50 basis points is also expected to soften the housing loan interest rates which also augur well for the industry's growth prospects. Also, major cement manufacturers in India are increasingly using alternate fuels, especially bioenergy, to fire their kilns which is not only helping them reduce production costs but also proving effective in reducing emissions. Besides, the proportionate sales of blended varieties of cement-Portland Pozzolana Cement (PPC) and Portland Blast Furnace Slag Cement (PBFC)-have risen over the years from 37 per cent in 2000-01 to over 70 per cent currently.
In view of all the above factors, it may be said that although the outlook for the cement industry does look challenging in the short term (next few quarters), but over a longer time-frame of about five years, the prospects appear quite encouraging given the potential demand that would be unleashed by the public and private mega infrastructure projects in the pipeline.