Cement: waning demand
Beset by waning demand for cement and the early onset of monsoon in some states, cement manufacturers are expected to report lack luster numbers for the first quarter of this fiscal.
The consensus among analysts is that cement companies are likely to report over 10% decline (y-o-y) in their bottom line during the considered quarter.
Analysts have asked investors to cut their exposure to cement companies as the industry is set to add close to 70 million tons of new capacity over the next two years which will snatch away pricing power from cement producers. In the pack, south-based companies are better placed with demand and price remaining firm.
Persistent government intervention (in order to control inflation) will disturb the functional equilibrium of the industry.
The pressure on PAT margins is expected to continue on the back of rising interest cost and higher depreciation on account of capacity additions. Cement consumption during the first quarter has grown 8% year-on-year. Cement prices during the quarter improved by Rs 3 per bag. On an yearly basis, the price has improved 6.9% and stood at Rs 242 per 50 kg bag.
There are mixed views with respect to near term price trend in cement. Prices are expected to remain weak on account of softening demand from real estate and infrastructure sectors. Analysts expect construction and infrastructure segments to go slow in the wake of rising interest rates and lower corporate funding activities.
The other premise reached upon by some is that prices are likely to move up on the back of strong demand and rising input costs. They feel that cement manufacturers will be forced to increase price as a result of rising coal prices and freight costs.
Cement (including clinker) exports are expected to decline by over 55% in the first quarter on account of temporary ban on exports. The government banned cement exports in mid-April, but later allowed exports from Gujarat port in end-May.
The metal sector is all set to begin the current financial year with a moderate set of numbers. The year-on-year growth rate is expected to be better compared to that a year ago.
However, on a quarter-on-quarter basis, analysts expect lower sales and the net profit, given the government’s decision in to curb steel prices in order to check inflation. Further, analysts expect sales growth to be tepid in the June quarter as against the March quarter, which traditionally records higher volumes.
Both the ferrous and non-ferrous companies have benefited from higher prices.
In addition to that, non-ferrous companies, which export a bulk of their products, are expected to benefit from the rupee depreciation.
The average net sales of top five metal companies are expected to grow by 19.2% (YoY growth) whereas the net profit is likely to increase by 11.2% for the quarter. As usual, the non-ferrous companies lag behind their ferrous peers as far as the growth is concerned.
The average net sales growth for top three ferrous companies is estimated to be slightly more than 30% whereas the same is close to 10% for the top three non-ferrous companies. The corresponding figures for the ferrous and non-ferrous companies during the June quarter of the last year were in the range of 17% and 7%, respectively.
However, the growth in net profit is non-uniform across companies. Within the ferrous segment, players like SAIL and Tata Steel, which are almost fully integrated (having own captive mines), would report a more than 20% growth in net profit.
Metal players who do not have captive mines would feel the pressure on their margins and are expected to report poor growth in bottom-line. This is on account of surging prices of raw materials, including iron ore and coking coal. While iron ore prices have increased by over 70% over the year-ago levels, coking coal prices have increased to three-folds in the same period.