Cement Firms’ December Quarter Earnings May Be A Mixed Bag
South-based cement firms may outperform peers in December quarter.
After the demonetisation shock, cement companies are expected to deliver a mixed set of earnings for the quarter-ended December 2016. While companies present pan-India and in the north are expected to deliver flat-to-subdued earnings, those based in the south may report healthy numbers.
Ambit Capital, in an earnings preview report, said north and east India are likely to be impacted the most by demonetisation, while south India is better placed as real estate is largely a white money economy in the region.
The top eight cement companies listed on India’s stock exchanges may see a muted revenue growth of -0.31 percent in October-December while net profit is expected to grow 18 percent compared to the corresponding quarter of the last financial year, according to Bloomberg consensus estimates. The sector’s earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to contract 1.45 percent year-on-year.
A Quarter Of Subdued Volumes
Cement sales are expected to remain weak in December, with overall industry volumes estimated to have declined by 1-5 percent during the month alone. While retails sales have seen a significant slowdown, institutional demand has held up on the back of government’s spending on roads and railways, besides state-funded irrigation programmes, says a report by Ambit Capital.
The average revenue of top eight cement companies is estimated to fall 0.31 percent year-on-year to Rs 2,014.5 crore. Much of the contraction could be witnessed by Ambuja Cement and Ultratech Cement, which are estimated to post a 6 percent drop in December sales.
South-based Orient and India Cement are expected to surprise with a better performance. Besides the geographic factor, volume growth of Orient Cement would also rise on account of additional production from its Gulbarga plant in Karnataka.
Higher Fuel Cost To Play A Role
Lower realisation, combined with higher fuel and freight costs, is expected to eat into the margins of cement companies. Average EBITDA of the top eight cement companies is expected to fall 1.45 percent y-o-y to Rs 338.8 crore for the December quarter.
Maximum growth in operating profit is expected by Orient and Shree Cement, while ACC is estimated to witness a 21 percent decline.
Shree Cement, which has a dominant presence in north India, is estimated to report a healthy EBITDA on the back of its continued market share gains and cost leadership. A likely 10 percent drop in volumes, driven by a loss in market share, is expected to be a key reason for ACC’s dismal performance in the December quarter.
A Kotak Institutional Equities report highlights that a sharp correction in pet-coke prices has been a major reason for a decline in costs of cement producers. But a gradual increase in pet-coke prices over the last one year to Rs 6350/tonne in December 16, from the lows of Rs 3600/tonne in January 2016, is expected to push up operational costs of these companies.
Southern Players To Outperform
Lower realisations and higher operating costs may affect the profitability of cement companies. Average profit after tax (PAT) of top six cement companies (excluding JK Lakshmi and Orient Cement) is expected to register an 18 percent y-o-y growth to Rs 145.6 crore for the quarter.
The situation would have been contrasting had it not been for gains of southern players. While Orient Cement’s PAT is expected to grow 12 percent y-o-y, Dalmia Bharat’s net profit is expected to rise 54 percent.
India Cement is expected to report a six-fold growth in its profit at Rs 33.60 crore as against Rs 5.46 crore in the corresponding quarter of the previous year. Which means, a low base or poor showing in the year-ago period will help India Cement, besides its geographical advantage.
Key Things To Watch
A Deutsche Bank report titled, “Q3FY17 preview -- first litmus test for impact of de-demonetisation’, puts out key things to watch out for:
- Shree Cement: EBITDA/tonne of anything below Rs 900 could be a negative (Deutsche Bank estimate is Rs 971).
- ACC : Volume growth less than 8 percent (DB estimate is 10 percent) could be a negative; and EBITDA/tonne above Rs 350 (DB estimate is Rs 246) can be taken positively.
- Ultratech Cement: Commentary on ongoing acquisition; EBITDA/tonne below Rs 800 (DB estimate is Rs 814) could be a negative
- Grasim Industries: VSF EBITDA/kg of anything below Rs 27 (DB estimate is Rs 30) is likely to be taken negatively.
- Ambuja Cement: EBITDA/tonne of anything above Rs 650 (DB estimate is Rs 582) is likely to be a positive.
- Ramco: EBITDA/tonne of anything below Rs 1,250 (DB estimate is Rs 1263) is likely to be taken negatively.
(The earnings estimates are based on the preview reports by four brokerages -- Deutsche Bank, Ambit Capital, Kotak Institutional Equities and ICICI Securities)