Companies & Sectors
Cement sector profitability headed towards its lowest in a decade, on supply glut, reports Crisil Research

With demand growing far slower than production, cement manufacturers will find it difficult to pass on increasing costs to customers, which is likely to result in a steep reduction in profit margins by 2012-13

Crisil Research has forecast that the profitability of the cement sector will decline to its lowest in a decade by the next financial year, mainly due to a huge glut in supply.

The independent research house said in a statement, describing the highlights of a study it has completed recently, that the supply glut will slacken cement manufacturers operating rates, consequently restricting their ability to pass on a sharp rise in power and fuel costs to consumers.

"The magnitude of the demand-supply imbalance and cost escalation will halve the cement industry's EBITDA margins from the current 20% to around 10% in 2012-13-the lowest level in the past 10 years," said Prasad Koparkar, head of industry and customised research at CRISIL Research.

Crisil estimates that over the next two years cement capacities will rise by 60 million tonnes per annum (mtpa), while demand will increase by much less, about 30 mtpa. Operating rates of cement manufacturers would, therefore, plunge to around 72% in 2012-13 from an already subdued 78% in the last fiscal.

In fact, the cement sector has been under pressure for some months now due to rising input costs and lower demand, particularly due to the slowing pace of housing construction that has historically been the largest contributor to cement demand. This, together with the seasonal drop in demand, has resulted in a decline in cement prices by about Rs35-40 a bag over the past couple of months.

According to Emkay Securities, demand growth has also been impacted by a slowdown in government infrastructure projects, and project clearances that have affected private spend. Interestingly, the country was importing cement a couple of years ago for construction work related to the Commonwealth Games.

Even as demand has turned sluggish, cement manufacturers are increasing capacity since the past couple of years. Ultratech Cement is spending over Rs2,000 crore on a unit, with installed capacity of three million tonnes, in Rajasthan's Jhunjhunu district. Birla Corporation has invested Rs4,000 crore to increase its cement production capacity. Shree Cement has commissioned its 1.80mtpa clinker grinding unit at Udaipur Udasar, in Sri Ganganagar district of Rajasthan.

Cement stocks have been mixed this year, The Moneylife Cement Index is down by 9% since 1st January 2011, against a 21% drop by the benchmark Sensex. The cement index comprises 29 companies. The only gainer since January has been NCL Industries (up 16%). Ultratech (down 2%), Ambuja Cement (down 5%) and ACC (down 6%) are down. Tow others Barak Valley Cements (down 51%) and Dalmia Bharat Sugar and Industries (down 55%) have lost heavily.

Crisil expects costs of power and fuel, a major input for cement, to increase by as much as 18% in the current financial year, in view of the steep increase in coal prices by Coal India, the leading supplier. An increase in effective excise duty rates will also lower cement manufacturers' net price realisations by 2%-4%.

Looking ahead, the research firm believes that small-sized cement manufacturers (with capacities of less than two million tonnes per annum) will likely post losses of about 2% at the EBITDA level in 2012-13. However, large cement manufacturers (with capacities of 10 mtpa or higher) would fare better than the industry average, with EBITDA margins of about 12%.

Key reasons for the better performance of large cement manufacturers is their greater use of captive power and inherent economies of scale. These companies meet three-fourth of their power requirements through captive generation. Small cement companies, in contrast, get a mere 5% of their power requirements through the captive route, and source the remainder from the more expensive grid power.

"Captive power can make a critical difference to cement profitability," said Ajay D'souza, head, Crisil Research. "Every 10 percentage point increase in captive power consumption can improve cement companies' EBITDA margins by 50 basis points."


REpower bags order to set up wind power projects in Canada

REpower has concluded a contract with WindWorks Power Corp for supplying 25 wind turbines for five projects in Ontario, Canada

REpower, which is a part of Suzlon group, has bagged orders for setting up wind power projects in Canada. Wind power entity Suzlon has about 95% stake in REpower.

According to statement from Suzlon, REpower has concluded a contract with WindWorks Power Corp for supplying 25 wind turbines for five projects in Ontario, Canada. However, financial details were not disclosed. "The wind farms will generate a total output of more than 50 MW," the statement noted. These turbines are scheduled to be delivered in 2013.

REpower Systems' managing director Helmut Herold said that for Ontario, these projects would not only serve to expand renewable energy sources in the region but also create numerous jobs as well as help in supporting the local economy. REpower Systems is the Canadian subsidiary of REpower Systems SE.
In the late afternoon, Suzlon Energy was trading at around Rs34.20 per share on the Bombay Stock Exchange, 4.6% down from the previous close.


IRB Infra expects 25% jump in toll revenues to Rs1,000 crore in FY12

The order book of IRB Infra stands at Rs11,700 crore, out of which Rs9,700 crore worth of EPC order book will be executed over the period of 3-4 years

Highways developer IRB Infrastructure Developers said it expects a 25% jump in its toll revenues to Rs1,000 crore by end this fiscal.

"We expect a 25% jump in toll revenues to Rs1,000 crore in FY12. There has been an increase in both tariff and traffic," IRB Infra chairman and managing director Virendra D Mhaiskar told reporters following the company's 13th annual general meeting.

The order book of the company stands at Rs11,700 crore, out of which Rs9,700 crore worth of EPC order book will be executed over the period of 3-4 years, he said. Out of 17 projects, 10 projects are already operational, six are under implementation and one is under financial closure.

"Surat-Dahisar and Kolhapur projects works have been almost 95% completed and the Goa project appointed date yet to be received from NHAI due to land acquisition issues," he said. The strong uptick in execution of projects is likely to result in 15%-20% jump in the topline of the company in FY12, Mhaiskar said. The company expects to tie up Rs3,500 crore in debt for a road project by end this calendar year.

"The debt part will be Rs3,500 crore which is 75% of the total cost of 1,000-lane-km Ahmedabad-Vadodara road project, he said.

When asked about the impact of the interest rate hike on the company's projects, he said, "Last year was tough for the infrastructure sector. Stagnation project bidding, rising interest rates and land acquisition issues have been the head winds slowing down the growth in general."

In the late afternoon, IRB Infra was trading at around Rs140.40 per share on the Bombay Stock Exchange, 4.36% down from the previous close.


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