Companies & Sectors
Higher profitability to sustain in cement industry, says Motilal Oswal

The cement industry’s volumes are likely to grow 8%-9% in FY13, driven by individual housing and expected infrastructure push, says a Motilal Oswal report

Motilal Oswal Financial Services hosted ACC, Ambuja Cements and Grasim/ Ultratech at the Motilal Oswal 8th Annual Global Investor Conference. Based on the conference and the inputs from the brokerage firm, the following observations have been made about the cement industry: (a) Volumes are likely to grow 8%-9% in FY13, driven by individual housing and expected infrastructure push. Seasonal price correction has been sub-normal till August due to delayed monsoon (b) Capacity addition should slow down to about 60 million tonnes (MT) over FY13-15. Increase in capex cost necessitates sustenance of higher profitability; downside risks are limited. (c) The costs of power, fuel and freight, which have been rising, are likely to stabilize at elevated levels. The focus would remain on enhancing operating efficiencies and maintaining margins.


Motilal Oswal observes that Ambuja and Grasim/Ultratech among large-caps and Shree Cement among mid-caps are the bright performers in the industry.


Other issues in the cement industry which have been pointed out by Motilal Oswal include that pre-election infrastructure spending has the potential to boost growth to over 9.5%, while expectations from organized real estate remain subdued. Delayed monsoon has resulted in lower seasonal price moderation till August 2012.  The cement majors expect demand-supply equation to improve, with slowdown in capacity addition. Only about 60 MT capacity addition is planned over FY13-15 and there could be delays, given the prevailing challenges in approvals and execution. While most players have exhausted their brownfield capacity addition potential, the economic feasibility of greenfield capacity is limited at current profitability.


In this context, Motilal Oswal states clearly that high capex cost necessitates sustenance of higher profitability. The companies guided greenfield capex cost at Rs7,000-Rs7,500/tonne (excluding captive power). Downside risk to prices is limited, given elevated capex and operating expenses. EBITDA/tonne of Rs1,200-Rs1,300 is required to earn reasonable RoIC (return on invested capital) and address 12%-14% cost of capital.


On the cost of production side, Motilal Oswal says that for the cement industry as a whole, the cost pressure is stabilizing; and there is conscious effort on the part of industry players to improve efficiencies. The costs of power, fuel and freight, which have been rising, are likely to stabilize at elevated levels. To combat inflation and high capex, the focus would continue to be on maintaining margins. Achieving energy efficiency, use of alternate fuels, increasing CPP (captive power plant) load factors, technical de-bottlenecking, etc, would be the key focus areas to enhance operating efficiencies.


Finally, as a prediction for the cement industry, Motilal Oswal says, “We believe that the worst is behind for the cement industry and a gradual and consistent improvement in capacity utilization and operating performance is impending. After the recent outperformance, cement stocks are trading at historical average valuations, leaving limited room for further re-rating. We expect strong earnings growth to drive stock performance, hereon.”


RIL may see larger drop in production at KG-D6 field

Reliance Industries had projected an output of 27.6 msmcmd for FY13. However, the fields have seen the output drop to 27.65 mmscmd in August itself even as the company shut eight wells due to water and sand ingress

New Delhi: Reliance Industries' (RIL) flagging KG-D6 gas field may see larger than previously projected drop in production as the company shut eight wells due to water and sand ingress, reports PTI.
The company, before the beginning of the current fiscal, had projected an output of 27.6 million standard cubic meters per day (mmscmd) for 2012-13. This, as per its own projections, was to further dip to 22.6 mmscmd in 2013-14 and then to 20.4 mmscmd.
But the fields have seen the output drop to 27.65 mmscmd before the end of August itself, sources privy to the development said.
The production has fallen by about one mmscmd since July and at this rate output may be less than projected output by the end of current fiscal.
Sources said the day can be saved if the government allows the company to do well interventions to revive sick wells.
Dhirubhai-1 and 3 (D1&D3) gas fields in KG-D6 block and MA oilfield in the same area produced about 30 mmscmd on debut in April 2009 and reached 61.5 mmscmd in March 2010 before water and sand ingress gradually brought down the output.
In the week ending 26th August, D1&D3 produced 22.11 mmscmd and MA another 5.54 mmscmd, according to a status report filed by the company with the Oil Ministry and DGH.
Sources said RIL had in its projections stated that output from D1 & D3 in 2012-13 would be 20.20 mmscmd and another 7.40 mmcmd would come from MA oilfield. In the subsequent year, production from D1 & D3 would further drop to 14 mmscmd while MA oilfield is expected to produce 8.60 mmcmd.
The output from KG-D6 is short of the 86.73 mmscmd (about 80 mmscmd from D1&D3 and the rest from MA field) level envisaged by now as per the field development plan approved in 2006.
This output was envisaged from a total of 31 wells. But so far, RIL has drilled only 22 wells on D1&D3 and only 18 of them have been put on production. Of the 18 wells, six have ceased production due to high water/sand ingress.
MA oilfield in the same block had seen two out of the six stopping production due to the same reasons.
RIL is the operator of the 7,645-sq-km D6 block with 60% stake while London-based BP plc has 30% interest. The remaining is with Niko Resources of Canada.
The firm had made a total of 18 gas and one oil finds in the block. Of these, two gas finds - D1&D3, and one oil - MA, have so far been put on production.


Reliance Capital declares 50% special dividend

The Anil Ambani group company has declared 50% special dividend on completion of 25 years. This is in addition to the 75% dividend already paid 

Mumbai: The Board of Reliance Capital Ltd on Monday approved a special dividend of 50% for shareholders on the completion of 25 years of the financial services arm of the Anil Ambani group, reports PTI.
"The Board of Directors of the company met today and approved a special interim dividend of 50%," Reliance Capital said in a BSE filing.
The special interim dividend will be paid to the shareholders of the company on or before 10 October 2012, the company said.
It is in addition to 75% dividend already paid.
Ambani, the R-Cap Chairman, had announced in the AGM recently that the Board of Reliance Capital would be considering a special interim dividend.


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