Key Sector Data Market Cap (Rs Crore) 127000 Market Cap (USD Million) 20159 P/E 16.1 P/BV 3.4 Debt/Equity 0.4 ROA (%) 13.9 ROE (%) 21.3 EV/Sales 1.6 EV/EBITDA 7.4

Cement
Period	Sales % Chg YoY	Operating Profit	PBIDT % Chg YoY	Adjusted PAT % Chg YoY	OPM (%)	PBIDT Margin (%)	PBT Margin (%)	PAT Margin (%)
201206	22	21	26	36	23.1	25.4	18.1	13.1
201209	20	66	60	116	19.3	21.2	12.8	9.4
201212	6	-6	-5	-20	16.2	18.1	9.4	7.7
201303	-1	-18	-16	-13	17.0	19.6	12.1	10.6
201306	-9	-36	-34	-41	16.4	18.6	10.5	8.6
201103A	20	-9	-10	-25	18.3	20.2	10.8	8.3
201203A	26	34	35	43	19.5	21.7	12.8	9.4
201303A	5	-1	-1	8	19	21	12	10

Cement companies are expected to see pressure on profitability for Q2FY14 after reporting weak numbers in the recent Q1FY14, in the wake of sluggish volumes, weak pricing, cost pressures and high base.

All-India cement prices saw price hike in in September 2013 following significant drop in cement prices in July and August coupled with continuous input cost escalation and the rupeefs decline.

The Cement & Lime Wholesale Price Index (WPI), weight of 1.39 in the WPI, declined 3.26%YoY in August 2013, trimming the overall growth rate to 1.19% YoY during Apr-August 2013 as compared 9.15% YoY in corresponding previous period. Meanwhile, the Grey Cement WPI dropped 3.66% YoY in August 2013, pruning the overall growth rate to 1.18% YoY Apr-August 2013 as compared 9.08% YoY in corresponding previous period.

Cement production (all kinds) growth from Indian manufacturers grew at 0.8% YoY in July 2013 compared with 3.2% YoY in July 2012, pulling down the overall growth rate to 2.7% YoY in Apr-July 2013. The cement production growth was 9.3% in FY13 as compared 6.7% in FY12.

With an above normal rainfall this year, harvests are likely to be good and rural housing demand may see a pick-up. Also, the pre-election spending on infrastructure by the government will help. There are reports of the government fast-tracking project clearances to push economic growth. Cement stocks at the current beaten down valuation will be a good addition to an investorfs portfolio.

Profitability under pressure in Q2FY14

Cement companies expected to see pressure on profitability for Q2FY14 after reporting weak numbers in the recent Q1FY14, in the wake of sluggish volumes, weak pricing and cost pressures. Also, if prices fail to revive in September (with monsoons still prevailing in some regions), realisations are likely to be sharply lower again on a year-on-year basis, exasperated by last yearfs high base due to delayed monsoons.

Rising input and energy costs have been squeezing margins at cement companies, while demand remains a worry amid a weakening economy and high interest rates, which have slowed housing and infrastructure development in Asia's third-largest economy.

Meanwhile, with minimal benefits from lower international coal prices (owing to depreciation of Indian rupee), operating profit per ton (ebitda/t) of cement companies could see a quarter on quarter dip in the range of Rs 200-250 (depending on regions).

Cement prices rise in September

Cement companies have hiked cement prices in September 2013 following significant drop in prices in July and August coupled with continuous input costs escalation and the rupeefs decline. Cement companies are expecting construction activity to increase considering the monsoon season is almost getting over, and are using this opportunity to bring prices back to the pre-monsoon levels.

Cement prices took a sharp hit during August after remaining relatively stable during July, as increased supply due to the entry of new players, poor demand owing to a weak macro and shortage of materials (sand/brick), and subdued construction activity owing to floods in some states and good monsoons across most regions.

Cement prices in India have declined by Rs 10-Rs50 per bag across regions in August 2013. The north and central markets witnessed a sharp fall of as high as Rs 40-50 per bag for select brands. In Andhra Pradesh, prices have corrected by Rs 60 per bag after sharp hikes of Rs 60-80 per bag in June. Other southern states have seen a milder decline of Rs 10-15 per bag. Declines in the western and eastern regions have been in the range of Rs 10-30 per bag.

Cement WPI fall in Aug

The Cement & Lime Wholesale Price Index (WPI), weight of 1.39 in the WPI, declined 3.26%YoY in August 2013, trimming the overall growth rate to 1.19% YoY during Apr-August 2013 as compared 9.15% YoY in corresponding previous period. The Cement & Lime WPI grew by 3.9% YoY in April 2013, 3.4% YoY in May, 1.7% YoY in June and 0.24% YoY in July.

WPI- Cement & Lime   FY14 FY13 FY12 Apr 171.8 164.9 154.3 May 169.8 164.9 155.3 Jun 170.3 167.5 153.6 Jul 169.9 169.5 153.0 Aug  166.0 171.6 151.9 Sep   171.1 152.5 Oct   170.3 157.5 Nov   168.2 160.6 Dec   164.9 161.3 Jan   168.4 160.1 Feb   169.9 160.5 Mar   172.3 163.1 Base Year: 2004-05=100

Meanwhile, the Grey Cement WPI dropped 3.66% YoY in August 2013, pruning the overall growth rate to 1.18% YoY Apr-August 2013 as compared 9.08% YoY in corresponding previous period. The Grey Cement WPI grew 4.1% YoY in April 2013, 3.6% YoY in May, 1.7% YoY in June and 0.12% in July.

WPI- Grey Cement   FY14 FY13 FY12 Apr 171.3 164.6 154.4 May 170.1 164.4 155.3 Jun 170.2 167.3 153.6 Jul 169.7 169.5 153 Aug  165.6 171.9 151.7 Sep   171.5 152.2 Oct   170.7 157.9 Nov   168.3 160.8 Dec   164.9 161.7 Jan   168.8 160.1 Feb   170.3 160.4 Mar   172.9 163.1 Base Year: 2004-05=100

Production growth slowed in July

Cement production (Cement all kinds) growth from Indian manufacturers, as reported by Office of Economic Advisor, Ministry of Commerce and Industry, slowed to 0.8% YoY in July 2013 compared with 3.2% YoY in July 2012, pulling down the overall growth rate to 2.7% YoY in Apr-July 2013.

The cement production grew at 5.2% YoY in April 2013 as compared 12.5% YoY in April 2012. The growth slowed to 2.4% YoY in May 2013 as compared 15.4% YoY in May 2012. The growth weakened further to 2.3% YoY in June 2013 as compared to 9.5% YoY in June 2012. The cement production growth was 9.3% in FY13 as compared 6.7% in FY12.

Cement Production Month FY14 FY13 FY12 Apr 22353 21248 18890 May 21808 21289 18450 Jun 20193 19740 18020 Jul   20045 18830 Aug   18497 17670 Sep   19499 16480 Oct   21238 19110 Nov   18040 18120 Dec   22038 20130 Jan   23238 21090 Feb   21458 20810 Mar   24788 22890 Numbers in Th. tonnes

Cement sector margin squeezes in Q1

The cement sector reported weak numbers in the recent Q1FY14 with fall in sales and profits due to weak economic conditions coupled with weak dispatches, poor pricing power and high operating expenses. The countryfs largest cement producers Holcim-controlled ACC and Ambuja Cement saw significant decline in their profits. Other companies like J K Lakshmi, UltraTech Cement and Grasim Cement have also posted decline in its net profit in the quarter.

The cement sector saw downward pressure at OPM (operating profit margin) in the Q1FY14 quarter due to increase in prices of domestically sourced fly ash, lime stone, iron ore, higher cost of packaging materials and other costs. The increase in diesel prices by the government and freight rates increases the transportation costs for cement companies. Coal India too, increased prices by 11% in May driving up prices of those sourcing coal from the company. Further weak pricing scenario also affected the profitability of cement companies. Consequently, cement producers suffered an average 5-8 percentage points dip in operating margins in the June quarter.

Ambuja cement: OPM contracts 650 bps due to poor pricing power and high operating expenses

Early onset of monsoon, overall economic slowdown and high fuel costs impacted Ambuja Cement's quarterly performance during Q2CY13. Not just the cement volumes were down; the realization was also under severe pressure, while high input cost significantly pressurized the margins due to lack of pricing power. The cement volumes during the quarter ended June 2013 fell 3% Y-o-Y to 5.38 mn tonnes, while the realization fell 5% Y-o-Y to Rs 4360 per tonne. Thus the overall revenue during the quarter fell 8% Y-o-Y to Rs 2376.50 crore. The freight expenses remained at elevated levels partly due to rising diesel prices and that impacted the margins significantly. As a percentage of net adjusted sales the freight expenses increased by 290 bps to 25%, while other operating expenses rose 260 bps to 18% of net adjusted sales. This was enough to adversely impact the operating profit margins (OPM) during the quarter by 650 bps Y-o-Y to 22%, although other operating expenses including the power & fuel expenses remained at manageable levels. The cement industry is going through tough times and lack of dispatch growth and realization pressure has so far been the major trait and the situation has been further compounded due to early onset of monsoon in most part of the country. The absolute operating profit fell sharply by 29% Y-o-Y to Rs 522.80 crore. Other income during the quarter fell 5% to Rs 74.37 crore, while the interest cost and the depreciation allowance stood at Rs 17.08 crore and Rs 122.33 crore respectively. After providing for income tax provision of Rs 133.56 crore during the quarter under review, the net profit after tax came in at Rs 324.20 crore, which was 31% lower Y-o-Y.

ACC: Margins contract due to significant fall in realization and higher operating expenses

ACC posted very disappointing set of numbers in Q2CY13 primarily due to poor dispatch growth and significant pressure on realization. The operating costs also remained at elevated levels while the lack of pricing power caused the margins to contract significantly during the quarter under review. General slowdown in the economy and early onset of monsoon across the country has caused the construction activities in most of the markets to stop and that has caused the dispatches to slowdown and realizations to fall. The cement volumes in Q2CY13 rose by 1% Y-o-Y (fell 5% Q-o-Q) to 6.12 mn tonnes, while the realization fell 6.4% Y-o-Y to Rs 4298 per tonne thus causing the cement sales to fall 3.5% Y-o-Y to Rs 2717.5 crore. The total revenue including the ready mix concrete revenue grew by 1% to Rs 2850.99 crore. Major components of operating costs increased sharply during the quarter. For e.g. the raw material cost rose 26% Y-o-Y to Rs 411.15 crore, while the traded goods costs and employee expenses rose 74% and 27% respectively on Y-o-Y basis. As percentage of net adjusted sales, the raw material costs rose 310 bps Y-o-Y to 14.4%, while the employee cost and traded goods cost increased 135 bps and 90 bps respectively to 6% and 2% respectively. This coupled with significant pricing pressure caused the OPM to contract 730 bps Y-o-Y to 17.2%. The absolute operating profit thus fell 29% Y-o-Y to Rs 489.26 crore in Q2CY13. The other income fell 55% Y-o-Y to Rs 35.01 crore, the interest costs fell 41% Y-o-Y to Rs 17.86 crore while the depreciation allowance increased 2% Y-o-Y to Rs 138.72 crore. Thus after providing for these finance charges the profit before tax fell 39% Y-o-Y to Rs 367.69 crore. The net profit after tax fell 38% Y-o-Y to Rs 259.09 crore in Q2CY13.

UltraTech Cement: Margins impacted due to volume de-growth & higher operating expenses

The performance of Aditya Birla group owned UltraTech Cement was disappointing during Q1FY14 due to lower cement off-take coupled with poor realization and higher operating expenses. The combined cement & clinker sales volumes during the quarter under review fell to 9.88 mn tonnes as compared to 9.94 mn tonnes in Q1FY13. The realization too remained under pressure as a result the total income from operation fell 2% Y-o-Y to Rs 4980.20 crore in Q1FY14. The cement demand across the country remained under severe pressure and particularly in the southern region poor demand caused some pressure on realization as well. On the other hand the increase in diesel prices and rupee depreciation impacted the overall operating expenses and that caused margin contraction during the quarter under review. The operating profit margin (OPM) contracted 420 bps Y-o-Y to 21.5% in Q1FY14. As a percentage of net adjusted sales the raw material cost rose 80 bps Y-o-Y to 14% while the freight expenses rose 170 bps Y-o-Y to 22%. The coal cost fell during the quarter but that was partially off-set by sharp rupee depreciation during the quarter. Nevertheless the power & fuel expenses fell 150 bps to 20% of net adjusted sales. The other operating expenses however rose 220 bps Y-o-Y to 16% in Q1FY14. The absolute operating profit as a result fell 18% Y-o-Y to Rs 1071.76 crore during the quarter under review. Other income rose 141% Y-o-Y to Rs 165.55 crore in Q1FY14. But higher interest cost and depreciation allowance caused the profit before tax to come in 16% lower Y-o-Y at Rs 919.20 crore in Q1FY14. The effective tax rate fell 200 bps Y-o-Y to 27% and that caused the net profit after tax to come in 14% lower at Rs 672.60 crore in Q1FY14.

India Cements: Fall in realization and higher operating expenses impacts the margins

Sharp increase in operating expenses caused India Cement to post extremely disappointing set of numbers in Q1FY14. Although the volumes were pretty impressive, the realization fell sharply and that coupled with firm operating expenses impacted the margins considerably during the quarter under review. The cement dispatch volumes rose 11% Y-o-Y to 2.65 mn tonnes in Q1FY14, while the realization during the period fell sharply by 6% Y-o-Y to Rs 4189 per tonne. The total revenue thus rose 3% Y-o-Y to Rs 1240.72 crore. This included the revenue from shipping, wind farm and the Indian Premier League (IPL) which stood at Rs 15.4 crore, Rs 5.3 crore and Rs 108.4 crore respectively. Operating profit margin (OPM) contracted 780 bps Y-o-Y to 15.6% due to higher power & fuel expenses and freight expenses. Both these cost head as percentage of sales rose 240 bps Y-o-Y and 260 bps Y-o-Y to 26% and 21% respectively. Even the raw material cost was higher by 130 bps Y-o-Y at 12.7% of net adjusted sales during the quarter under review. As a result the absolute operating profit fell 31% Y-o-Y to Rs 193.41 crore. The interest cost was Rs 99.88 crore in Q1FY14 as compared to Rs 94.94 crore in Q1FY13, while the depreciation allowance fell 2% Y-o-Y to Rs 67.95 crore. The profit before tax (PBT) after adjusting the extraordinary loss of Rs 20 crore that the company incurred during the corresponding quarter of the previous year came in at Rs 25.73 crore, which was 74% lower compared to Q1FY13. The net profit after tax fell 73% Y-o-Y to Rs 16.82 crore.

Madras Cement: Sharp fall in realization and higher operating expenses impacts the margins

Madras Cement posted disappointing set of numbers in Q1FY14 due to sharp fall in realization and higher operating expenses. The demand in Tamil Nadu and Kerala were very weak during the quarter under review for the company although the demand in Karnataka and the East market were pretty buoyant. Early onset of monsoon in most of the company's major markets caused demand depression during the quarter. The overall total revenue of the company during the quarter under review fell marginally to Rs 987.18 crore as compared to Rs 990.78 crore in Q1FY13. The cement volumes during the quarter for the company rose marginally by 2.6% Y-o-Y to 2.21 mn tonnes, but the realization fell sharply by 5.3% Y-o-Y to Rs 4183 per tonne. So pricing power constraint coupled with rising operating expenses meant that the operating profit margin (OPM) contracted sharply by 900 bps Y-o-Y to 22.6% in Q1FY14. The company sells around 62% of its total produce in the states of Tamil Nadu and Kerala and the volumes growth and realization has remained under pressure in these regions for some time now. The operating costs during the quarter under review rose significantly driven primarily by the raw material cost due to higher usage of imported gypsum, higher fly ash and limestone cost. As a percentage of net adjusted sales the raw material cost rose 230 bps Y-o-Y to 16.5% while the power & fuel expenses rose 90 bps Y-o-Y to 22%. The employee cost increased 100 bps Y-o-Y to 5.5% in Q1FY14. So the overall operating expenses rose sharply by more than 1050 bps to 78% of net adjusted sales during the quarter.

As a result the absolute operating profit fell 29% Y-o-Y to Rs 223.17 crore. After providing for interest cost and depreciation allowance which fell by 17% and 3% respectively the profit before tax (PBT) fell 43% to Rs 104.30 crore in Q1FY14. The net profit after tax came in at Rs 68.85 crore, 44% lower than the same quarter of the previous year.

Shree Cement: Power business continues to impresses

North India's largest cement manufacturer Shree Cement's performance disappointed this time around especially on the cement segment as the volumes and realization were impacted due to early onset of monsoon and general slowdown in demand in the company's major markets. The power segment though continued to impress as the volumes increased to 794.7 mn units in Q4FY13. The total revenue remained flat during the quarter ended June 2013 (Q4FY13), growing by just 1% Y-o-Y to Rs 1449.01 crore. The cement volumes witnessed de-growth of 6% Y-o-Y to 3.17 mn tonnes, while the cement realization fell 5% Y-o-Y to Rs 3578 per tonne during the quarter under review. Besides the realization pressure the costs were also at higher levels for the cement segment and that impacted the overall operating margins (OPM) during the quarter by 680 bps Y-o-Y to 26.7%. The absolute operating profit thus fell 20% Y-o-Y to Rs 387.22 crore. On the cost front the power & fuel expenses witnessed steep increase and as percentage of sales rose 400 bps Y-o-Y to 28% during Q4FY13. The raw material cost and employee costs rose 100 bps Y-o-Y to 10% and 6% respectively while other operating expenses rose 100 bps to 13% of adjusted net sales during the quarter under review. After providing for depreciation allowance which rose 63% to Rs 133.17 crore and interest expenses which fell 21% to Rs 37.82 crore the PBT came in at Rs 300.24 crore, 22% lower than the same quarter of the previous year. The total tax expenses during the quarter increased to Rs 47.85 crore as compared to Rs 15.69 crore during the corresponding quarter of the previous year, and the net profit after tax came in at Rs 284.31 crore (19% lower Y-o-Y).

ACC plans Rs 3,000-cr capacity expansion in eastern region

Cement major ACC Ltd is planning to invest Rs 3,000 crore to expand its capacity to 10 mt a year from the existing 6 mt a year in next three years in the in three eastern region States. ACC plans for expanding capacities at two existing plants - Jamul in Chhattisgarh and Sindri in Jharkhand and expected to start construction of a 1.5-million-tonne grinding unit at Kharagpur by next January next.

UltraTech snaps up Jaypees Gujarat cement unit for 3800 crore

Aditya Birla Group's flagship UltraTech Cement has acquired a unit of Jaypee Group in Gujarat for an enterprise valuation of 3,800 crore. UltraTech will assume 3,650 crore of debt and issue 150 crore of equity to Jaypee for the 4.8 million tonne (mt) unit, which would raise UltraTech's capacity by 9% to 59 mt and reaffirms UltraTech's position as the largest cement producer in India. The company expects the transaction to close in seven to nine months.

The deal also brings with it 57.5 MW power capacity (thermal), limestone reserves that
can last for 90 years at current capacity and a captive jetty, all of which may help reduce costs for UltraTech Cement and may provide synergy as well. Also, Gujarat being a market where cement supply and demand are neck-and-neck and the capacity utilisation of producers at over 80-85 per
cent, UltraTech can make the most of this acquisition now.

Gujarat is also strategically well located from the point of view of exports. The grinding units of JP Associates will also help the company cut its logistics expenses due to proximity to key markets.

Outlook

The cement sector, which saw an unprecedented drop in demand and prices in recent months due to weak economic conditions and the monsoon, is expected to see its fortunes turn around soon. With an above normal rainfall this year, harvests are likely to be good and rural housing demand may see a pick-up. Also, the coming up of festival season and the pre-election spending on infrastructure by the government will help the cement prices and demand to go up.

The government mostly pumps funds for infrastructure & housing projects in its bid to increase its probability of winning another term. While projects would be announced 12]15 months ahead of the elections, the cement is actually consumed during the project execution phase with a lag of 5]6 months.

For FY2014 as a whole cement demand growth is expected to remain muted at ~6%. Thus, we believe that near-term weakness in cement stocks can be used as opportunity by long term investors to increase their holdings.