The going has not been very good for large-cap cement stocks in the third quarter, given their underperformance compared to the Sensex. The third quarter results are expected to see large cement companies reporting a contraction in earnings as cement prices have not risen materially after the Competition Commission of India's order.
In December, cement prices saw a decline across markets as they fell between three to 11 per cent across India. Even in the southern markets, where prices have largely been static, cement prices declined, especially in Hyderabad. A section of analysts believe that the current capacity in the system will prevent players from hiking prices further.
Though the long-term outlook on the sector is positive as the issue of capacity additions is gradually waning, the fact that prices have fallen in the third quarter will impact profitability, both sequentially and annually. Typically, cement prices rise as construction activity picks up after the sluggish monsoon season. However, this time demand has not shown the kind of uptick required to hike prices.
Channel checks done by analysts suggest that dealers believe prices will bottom out over the next few weeks. The pan-India average price is currently at Rs 280-285 per bag, down from the October average of Rs 290-300 a bag, explains Religare. With despatches remaining weak for the quarter (October-December) and prices softening in November-December, the brokerage expects companies to report muted third quarter numbers.
Analysts do not see much volume growth in the third quarter for most large companies. Kotak Institutional Equities is factoring in a marginal volume growth for India Cements, no growth for Grasim Industries, a four per cent year-on-year (y-o-y) volume growth for ACC and two per cent volume growth for Ambuja.
However, Angel Broking is optimistic on revenue growth of its cement universe. The brokerage expects its cement universe to report a 13.2 per cent y-o-y improvement in top line, driven more by higher realisations. The uptick will be largely driven by the robust show put up by select mid-cap companies. But margins of most companies will come under pressure, even if their top line growth is robust, due to higher costs. Be it power, freight or raw material, most costs are up this year compared to the corresponding period in the previous year.