Delayed Impact Of Demonetisation Will Weigh On Profitability Of Cement Makers

A delayed impact of demonetisation, slowdown in government spending due to elections in northern states, and political uncertainty in Tamil Nadu are likely to weigh on cement makers’ earnings in the three months ended March.

A drought in Karnataka and Kerala is also expected to have a bearing on the sector, according to brokerage IDFC Securities Ltd. in a report. Yet, demand could see some recovery in March due to year-end pick-up in execution of government projects, the report said.

Pan-India players are expected to post a weaker growth compared to regional companies, which continue to gain market share amid a relatively better increase in volumes, according to Kotak Institutional Equities. ACC Ltd., a pan-India player, will be the first to report the March quarter earnings on Friday.

Earnings Expectations

Here are the Bloomberg consensus estimates for the top eight cement companies...

• The cement makers could see a muted revenue growth of 5.74 percent in January-March while net profit is expected to decline 10 percent.
• The sector’s earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to contract 23 percent year-on-year.
• Revenues of pan-India players like ACC, Ambuja and Ultratech Cement are estimated to grow in the range of 0.33-3.75 percent.

South-based Orient Cement Ltd. and India Cement Ltd. are expected to surprise with a better performance. Volume growth of Orient Cement would rise on the back of additional production from its Gulbarga plant in Karnataka. Its revenue is expected to jump 74.81 percent year on year.

Northern companies like Dalmia Bharat, Shree Cement and JK Lakshmi Cement are expected to post a revenue growth of 7-14 percent.

Higher Pet Coke Prices To Dent Profits

Sequential increase in costs due to higher petroleum or pet coke prices may weigh on the profits, according to the Kotak report. Pet coke, an oil refining byproduct, is a key input in cement. Previous quarters partially benefited from lower priced carry-over inventories. That stock of low-cost pet coke is exhausting, according to IDFC Securities.

The average pet coke price increased 11 percent sequentially in the third quarter ended December. The prices firmed up by 10-12 percent in March due to higher demand after some weakness in the previous months.

Besides, poor capacity utilisation is also expected to eat into operating performance of cement makers.

North-based Shree Cement Ltd. and its southern peer Orient Cement are the only companies which are expected to see profits rise in the March quarter, according to a Bloomberg poll of analysts.

Key Things To Watch

Here are the key things to watch, according to the IDBI Capital report..

• ACC: Negative volume growth, but better sequential operating performance.
• Ambuja Cement: Northern cluster to aid in realization growth
• Shree Cement: Merchant power could be a drag on overall performance
• UltraTech Cement: Higher other income to cushion fall in operating costs

Estimates For ACC

• The company is expected to report 0.33 percent growth in revenues to Rs 3000.45 crore, according to Bloomberg estimates.
• Operating profit is expected to fall 26.40 percent year on year, but is likely to rise 25 percent sequentially to Rs 318.59 crore.
• Its net profit is expected to decline by 31.25 percent year on year to Rs 159.62 crore.
• Volume growth may decline 2 percent year on year, according to the IDBI Capital report.