Greenshoots visible on growth, cost & price fronts
The April-June 2018 (Q1) report card of some major cement companies is out, and it has highlighted the major and persistent structural concern affecting the industry - the absence of price hikes. However, greenshoots are visible on several parameters in the industry, which is expected to get even starker in the July-September 2018 quarter.
Drawing from the highlights of UltraTech Cement's management commentary in their outlook during the announcement of their results, CLSA's Vivek Maheshwari said, 'UltraTech management believes that the upcycle has begun and it sounded very confident as it believes that this current upcycle would be the longest in recent history. Demand drivers such as big infra projects and rural are in place to drive 8-10 per cent demand growth (or even double digit) in the medium term. As against this, capacity CAGR would be 3-4 per cent, driving up utilisation rates.'
The UltraTech's management was also sanguine about the rise in prices in the coming quarter, citing that June exit prices were higher than the quarter's average, though lower than expected spot cement prices are still forcing analysts to be cautious on growth in profitability of the industry. On costs front also the company was positive stating that cost pressures are close to peaking, and there would be margin-accretive price hikes ahead. However, UltraTech had a weak quarter as net earnings declined 33 per cent year-on-year (YoY) to Rs 6bn.
'Demand commentary remains very robust. (The UltraTech) Management expects demand to grow at near double digits led by infrastructure, and its multiplier effect on housing in the medium term,' said Vaibhav Agarwal of PhillipCapital India, while calling the cost management of the company 'Excellent' - resulting in flat YoY and rise of just 2 per cent quarter-on-quarter (QoQ).
Meanwhile, ACC has reported robust numbers, even surprising the market on several fronts. Despite the absence of high margin business segments (such as white cement for UltraTech), ACC has reported a 5 per cent QoQ jump in cement realisations in Q1. The company's EBITDA grew by 10 per cent YoY to Rs 5.4 billion. Net earnings grew 1 per cent YoY to Rs 3.3 billion.
'These results clearly showcase that ACC's focus on realisation trend in Q1 was way ahead of its peer UltraTechà These numbers also showcase that ACC has probably geared up on its brand positioning vs. UltraTech in Q1. UltraTech's blended realisations moved up by mere 2 per cent in Q1FY19/Q2CY18 û way lower than ACC and despite both being pan-India majors,' says Agarwal. The company's EBITDA/tonne was at Rs 752.
'ACC's adjusted unit EBITDA rose to a six-year high of Rs 810per tonne. We believe the savings from the cement/clinker-swap with Ambuja are yet to kick-in and will help in the future. At 89 per cent utilisation, ACC needs new capacity, and market share loss remains a risk,' says Maheshwari.
ACC's blended realisations, which were earlier at a discount of Rs 120-140/tonne versus UltraTech (in comparable quarters to Q1- YoY and QoQ), has reversed to a positive of +Rs 20 per tonne in favour of ACC in Q2CY18/Q1FY19, according to CLSA. This is unadjusted for any revenues for white cement business for its peer UltraTech, else the gap would have been even higher and in favour of ACC, says Agarwal.
Analysts term ACC Q1 results that they were good results overall, beating their expectations. Ambuja Cements, which shares the same parentage with ACC û LafargeHolcim - has also done well during the quarter under review despite challenges.
Ambuja's April-June 2018 quarter standalone EBITDA declined 13 per cent YoY to Rs 5.3 billion and other income was boosted by dividend from ACC, depreciation was in-line while interest was lower. The tax rate was lower, helped by the dividend receipt. Pre-exclusive earnings grew 27 per cent YoY to Rs 5.0 billion, sharply ahead. Consolidated EBITDA fell 3 per cent YoY to Rs 12.5 billion and net earnings 5 per cent YoY to Rs 6.9 billion.
Another cement major, Shree Cement's Q1 EBITDA declined 19 per cent YoY to Rs 5.8 billion, despite a positive surprise from its power business and cement volume growth of 19 per cent YoY to 7mt. Depreciation rose 31 per cent QoQ mainly due to the commissioning of Kodla Grinding Unit and interest costs. Other expenses spiked 29 per cent YoY due to an Rs 700-million mark to market (MTM) loss on a foreign exchange loan. Net earnings fell 36 per cent YoY to Rs 2.8 billion.
Cement realisations, however, declined 1 per cent QoQ to Rs 205 per bag against the estimate of a flattish trend. Unit costs rose 4 per cent QoQ mainly led by cost inflation in power and fuel costs. Weak realisations and cost pressure weighed on its Unit EBITDA, which fell to Rs 763 per tonne, down 20 per cent QoQ, and notably at a 12-quarter low. Adjusting for MTM though, its unit EBITDA was better at Rs 863 per tonne, says Maheshwari.
Power business volume of Shree Cement rose a neat 31 per cent QoQ and an even higher 58 per cent on a YoY basis led by strong demand. Unit realisations also improved 16 per cent sequentially, and along with higher volume, was the key driver of the earnings surprise. Unit costs rose a small 2 per cent QoQ. Power EBITDA came in at Rs 420 million, and its contribution to overall EBITDA rose to a multi-quarter high of 7 per cent.
BS Srinivasalu Reddy