Indian cement firms to report better results on low costs

India's top four cement companies - ACC, Ambuja Cements, Grasim and Ultratech Cement - are expected to report improved earnings on a Y-o-Y basis in the September 2009 quarter, thanks largely to a reduction in key input costs such as power & fuel on a per-tonne basis on a Y-o-Y basis, coupled with lower freight costs.

These cement majors are expected to report a 34.7% Y-o-Y growth in their core net profit for the September '09 quarter compared with a 27.1% growth reported in the June 2009 quarter, given the beneficial impact of lower power and fuel costs. Imported coal prices at $75?C80 per tonne in the September '09 quarter are lower by about 50% on a Y-o-Y basis.

What has also helped is the delay in rains in several parts of the country, which has helped ensure continued strong demand conditions in the September '09 quarter from segments such as government-funded infrastructure projects and the housing sector in smaller towns and rural areas.

Typically, cement prices weaken during the monsoon season. But this trend was more visible, especially in some southern markets. However, on an all-India basis, cement prices are estimated as broadly flat on a Y-o-Y basis at Rs 3,670 per tonne levels during the September '09 quarter, going by various estimates.

Improved demand conditions for the cement industry in the September '09 quarter have come at a time, when the industry is projected to add nearly 50 million tonne of capacity over the next 18 months.

However, the performance of the September '09 quarter and the earlier June quarter are not strictly comparable, taking into account the monsoon season.

For an all-India player like ACC, according to ETIG and various brokerage house estimates, the company's net sales are expected to grow by 1.8% Y-o-Y to Rs 1,999.6 crore in the September '09 quarter, given a 3% Y-o-Y growth in its cement dispatches, coupled with broadly flat cement realisations. However, analysts are expecting a 52.9% Y-o-Y growth in its net profit in the second quarter of FY10, coming from lower costs.

For Ambuja Cements, analysts are forecasting a 15.5% Y-o-Y growth in its net sales in the September '09 quarter. Its cement dispatches grew by 5.5% in September '09 quarter, coupled with an estimated 8.7% Y-o-Y growth in realisations.

Ambuja's dispatches are mainly in northern and western markets, where prices are still holding up on a Y-o-Y basis. In the case of Ultratech cement, net sales are expected to grow by 10.1% Y-o-Y in the second quarter of FY10, helped by a 10.9% Y-o-Y growth in cement despatches in July and August 2009, but realisations could weaken, given its expanding presence in southern markets. However, its net profit is forecast to improve by 66.5% Y-o-Y in the last quarter, helped by lower operational costs.

Analysts expect Grasim to report a 7.4% Y-o-Y growth in its net sales on a standalone basis, despite hiving off its sponge iron business with effect from May 2009. Growth in Grasim's topline is expected largely from enhanced cement volumes.

ACC at Rs 796.3 gets a P/E of 10.1 times on a trailing 12-month basis and we are neutral on this stock. Grasim, on the other hand, is trading at a P/E multiple of 13.4 times and looks fully valued, given its recent decision to hive off its cement division into a separate subsidiary.

From China Cement (2009-10-13)