Operating margins for cement companies may be hit in short-term

Operating margins for cement companies may be hit in short-term
Leading cement companies are expected to report a moderate improvement in their net profit in the December 2011 quarter. This is despite higher realisations on a per tonne basis in the quarter, according to ETIG estimates.

The boost comes from Holcim-controlled ACC and Ambuja Cements, which are expected to see a significant jump in their tax burden in the quarter, given a rather low base effect a year ago.

Ambuja Cements is also expected to post barely 8.5% growth in its net profit for the December quarter. Earlier, ACC had grown its consolidated net profit by 84.6% y-o-y in the September 2011 quarter, partly helped by a low base effect a year ago.

The diversified player Grasim Industries (present across cement, VSF, Chemicals and textiles) is also expected to grow its net profit by 12.8% y-o-y in the December quarter, compared to a 16.6% growth in net sales, as it faces a higher cost structure.

Coal India had announced a new pricing mechanism from January 2012 and analysts tracking the sector point out that this could lead to a further rise in power and fuel costs for the broader cement sector, going forward. This could squeeze operating margins of cement companies in the short term or cement prices will have to rise further.

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In the case of ACC, its realisations are expected to improve 10-11% y-o-y on a per tonne basis in the quarter under review, helped by strong prices in the southern and western region. Higher realisations should help leading companies in the sector deal with a rising cost structure.

Although, imported coal prices have eased to about $110 levels towards the end of the third quarter of FY12, from an average of $120 per tonne in the September 2011 quarter, the rupee has weakened close to 20% over the past few months. Price of coal from key domestic suppliers such as Coal India had also been raised earlier. Freight costs for cement companies, too, remained at elevated levels.

However, a higher tax burden will mean that ACC's consolidated net profit will grow by just 7.8% y-o-y in the fourth quarter CY11 (company follows a calendar year for its results) compared to net sales growth of 18.9%. Its cement despatches had also grown 5.6% y-o-y in Q4 CY11 and that was slower than the growth reported in the earlier three quarters of CY11.