Cement: Nothing concrete about it

S. Vaidya Nathan

Cement industry stocks have been in the limelight in recent months.

Some of the stocks such as ACC, Grasim, Larsen & Toubro, Gujarat Ambuja and India Cements have witnessed considerable investor interest. Much of the rise in stock prices has been linked to the underlying trends in cement prices. Given the sluggish undertone in the economy, the players of the cement industry are on a slippery slope. With the demand-supply equation still very much skewed towards the latter, without cartel-like arrangements, ramping up prices may be a tough task for the industry. The outlook for the cement industry hinges largely on the price levels that would prevail. The profitability levels in the industry, barring a few companies such as Gujarat Ambuja, Madras Cements and of late ACC, depend heavily on sharp spurts in prices.

Prices down, but up now

In 2001, cement prices have been a tale of a fairly sharp decline with a recovery of sorts in the last two-and-a-half months. But it is a tenuous recovery in much the same way the ramping up of cement prices in 2000 proved to be. The downtrend was not surprising in the first place for the following reasons:

There continues to be a big gap between supply and demand that casts a shadow over prices.

The cartel-like production-cut arrangements could not have continued indefinitely without some companies losing out. As such it could not last and this has been the case.

In the first six months of 2001-02, there has been a volume growth of 5.6 per cent. This is better than in the corresponding period of 2000-01. But the growth rates are not good enough to support the high prices levels of the second half of 2000 and early 2001.

Higher prices can evoke resistance from users as it did in 2000 and if producers intend maintaining such price levels, it may have to be at the expense of volumes. This has to be seen in light of the fact that high cement prices have become a subject of agitation and political controversy in many parts of the country.

It is still a consumers market despite all attempts to try and maintain higher price levels.

Interesting price point

Perhaps the most interesting price action in cement has happened in the southern markets — especially in Tamil Nadu. Noticeably, within a month or so of the government changing hands, there was a steep decline in cement prices, of around Rs 40 per 50 kg bag.

The prices had declined to Rs 125-140 per bag from the highs of Rs 190-200. The issue of cement prices has surfaced frequently in the political arena.

This drop had to be seen in the light of a similar magnitude of price rise in absolute terms last year and an even higher rise in percentage terms — 60 per cent. In contrast, the decline had been around 30 per cent. In the last couple of months, the prices have moved up to Rs 160-170.

* Now, the Government has called on the producers to cut prices. There would have to some cut from the present levels. The kind of political hue that the issue has taken also means that there may be troubles in pushing prices much once the North-East monsoon gets over. The highs of last year look unlikely.

* Given the trends so far this fiscal, the possibility of a lowering of prices at the behest of the government and even allowing for some uptrend in the January-March period, the average price levels are likely to be lower than in 2000-01. This would mean a straight knock on profitability.

Notably, the prices in the Andhra Pradesh market have also moved down sharply without the kind of recovery seen in most other markets. With demand growth in the region expected to be lower, there is every likelihood of profitability being hit by lower prices as well as sluggish volumes.

Trends in key markets

Prices in other key markets such as Mumbai, Kolkata and Delhi too have seen some recovery after declines. But prices are close to the average levels over the last five years. A boost to profitability on account of prices does appear unlikely in this fiscal.

Better growth rates, but...

Quite clearly the industry across regions appears to be still caught up in the web of over-capacities. At the other end of the spectrum, the demand curve presents a better picture now than in 2000-01. Unlike the flat trends then, this fiscal has seen some volume growth.

The growth rate of around 5.6 per cent has been much better than what has been achieved in many other key sectors in this fiscal. But whether this would last remains to be seen. A lot would hinge on any volume growth driven by spending on road projects by the government and a further boost to growth rates in housing.

With housing starts — in terms of disbursements by housing finance companies — showing a healthy growth rate, there is room for optimism on this score. But that would be restricted to a repeat of last year's showing and not much more.

If cement companies ramp up prices as they did in 2000, there is the possibility of postponement of some projects at least. The bottomline is quite clear: The industry would have to first bring the demand-supply equation to a manageable level before sustainable pricing power improves. This may be at least two to three years away without any fresh capacity addition.

Volume-efficiency game

What all this volatility in prices boils down to is this: Ultimately the winners are going to be companies strong on efficiency and with room for volume growth. Some companies that are well placed are Gujarat Ambuja, Madras Cements, and ACC (which holds prospect of better efficiency in operations under the auspices of the Gujarat Ambuja group).

* Grasim and L&T have the ability to ramp up volumes. These companies have a similar geographical spread but operate at good efficiency levels whereas in ACC there may still be room for considerable improvement. From the universe of listed cement companies, these five may be the ones to watch.