New Delhi: Rating agency Fitch today said the continued overcapacity in the cement sector will exert further pricing pressure on the commodity in 2011, leading to squeezed margins for the manufacturers, reports PTI.
"The widening demand-supply gap is expected to affect capacity utilisation levels of cement companies. We expect further pricing pressure in the wake of the lower capacity utilisation," the rating agency said in a report today.
Cement firms are facing pricing pressure since May 2010 due to the over-capacity situation. The price of the commodity in the retail market is now hovering around Rs250 per bag of 50 kg in Mumbai, Rs210 in Delhi, Rs255 in Chennai and Rs240 in Kolkata, respectively.
India's installed cement manufacturing capacity stood at 291.3 million tonnes per annum (mtpa) in FY'10. Around 34 mtpa capacity addition is expected to take place in FY'11 taking the tally to 325.2 mtpa. Demand, on the other hand, is expected to rise by 17 mtpa to 217.6 mtpa in FY11.
"We forecast around 10% demand growth and over 12% capacity addition in 2011. The overcapacity is likely to result in pricing and consequently margin pressures for most cement companies," it said.
The southern region with large demand-supply gap, which is likely to widen further, will witness particularly heavy pricing pressure, followed by the west and east, the rating agency added.
Cement firms' revenues were weak in the June-September 2010 on account of lower prices and are expected to remain subdued with the prices declining.
"Furthermore, raw material and freight costs have also been on a rising trend further affecting the profitability of the cement companies. We expect profitability to remain under pressure in 2011 with prices and costs remaining largely at current levels," Fitch said.
The rating agency did not paint any rosy picture for FY' 12 and FY' 13, either projecting around 68 MT more cement making capacity addition in FY'12 and FY'13 together. The cumulative demand growth, projected during the two fiscals, is only 50 mtpa.
Broking stocks are staring at a bleak future, with a decline in revenues on account of a shift in volumes from cash to derivatives and poor penetration in retail stock investing
Experts have forecast a good year for the stock market. But even as the Sensex climbs to new highs, the picture doesn't look so bright for shareholders of brokerages firms which operate at the heart of the stock market, according to analysts tracking these companies.
Consider this: Since 1 January 2008 up to 5 January 2011, the stocks of major brokerages have fallen by more than 50%. Motilal Oswal Financial Services is down by 55%, Edelweiss Capital is trading down by 72% and India Infoline has plummeted a whopping 79%. Similarly, Indiabulls Financial Services has tanked by 77% and Geojit BNP has fallen by 62% in the period. It is interesting to note that during the three-year period, the BSE benchmark index-the Sensex-has remained flat.
All leading brokerage firms have been performing poorly over the last three years, even as the market is headed higher. The recent quarterly results of these firms show no signs of revival. The total revenue of Motilal Oswal Financial Services in the September 2010 quarter stood at Rs8.95 crores, a sharp decline of 61% over the previous corresponding quarter. India Infoline, which is not as dependent on broking income, still saw September quarter revenues decline by 6% compared to the year-ago quarter.
The main reason for decline in revenues of brokerage firms has been the change in revenue mix and poor penetration of retail stock investing. Despite powerful economic growth and a rising stock market, the retail investor community has not been enthusiastic about stock investing. This is partly due to the inadequate developmental role of the regulator and stock exchanges and too many cases of malfeasance by the broking community.
Moneylife has written a series of stories on the diminishing investor population, with analysis and commentary on various issues such as price manipulation, the role of market regulators, and so on. The reports pointed to the comments by union minister of state for finance, Namo Narain Meena, in response to a question in Parliament, that the Indian capital market is narrow, shallow, illiquid and concentrated in the hands of a few individuals located at a few centres. (Read, 'Different Strokes: Where are the investors?' )
Sardar Sukh Dev Singh Dhindsa, member of parliament, had raised a question in parliament about the number of client identities and PAN identities that traded actively in the market on the National Stock Exchange (NSE), in April-June 2010, and accounted for 50%, 60%, 70%, 80% and 90% of the total trading turnover on average, on a daily basis, in the cash equity market and in the F&O (futures & options) segments. The minister said in his reply that 30.90 lakh investors traded on the NSE's cash market in the three months, but 90% of the investment came from only 1.92 lakh investors-in other words, trading volumes of the bulk of investors are trivial and irrelevant. The number drops to a fourth (41,654) when you consider 80% of the turnover. And, finally, 50% of the turnover came from a shockingly low 451 investors, of which 156 were proprietary traders. He further stated that 106 participants account for half the derivatives market turnover. The minister's comment suggests that the market being very narrow, tracking price manipulation should be easy.
Poor market penetration has combined with the change in market structure itself. Even those who are trading regularly have taken to options, which results in low revenues for brokerage firms.
According to Aditi Thapliyal, analyst - banking and financial services, Execution Noble, "The main reason for the fall in broking stocks is muted growth in the cash segment of the market, with a majority of the volumes coming from the futures and options segment, which is a very low margin business."
This was echoed by Apurva Shah, head of research at Prabhudhas Lilladher, "There are multiple factors for the poor performance of these stocks. The major one is volumes, which are growing, but the commission pool remains very low. Also, there is not much margin from options trading."
Another analyst feels that the low retail participation is also a reason for the low performance of these stocks. "There is very low retail participation, which has taken toll of the stocks of brokerage firms. Currently, there is more participation by foreign investors. Equity investment, which is the main driver for these stocks, is largely under-penetrated in India. May be after a quarter, we would see some improvement," said the vice-president of research at a leading brokerage firm, who requested not to be named.
According to Mr Shah, "It is tough to say if these stocks will perform anytime soon as the cash segment remains mired in low volumes. In the near future there won't be any change. Long term we can see some change as valuations may come down."
Within this segment, there would be some stocks which would do better than the others. "Our top pick among broking stocks is Edelweiss. We expect the stock to outperform its broking peers given that its financing segment in particular is showing a great deal of traction. For India Infoline, the stock is yet to recover from the reputational damage to its franchise from its involvement in the Money Matters QIP," Ms Thapliyal said.
Anil Ambani group firm Reliance Infrastructure Ltd said it will consider allotment of shares tomorrow, estimated to be worth about Rs4,000 crore, to a promoter entity.
The shares will be allotted pursuant to the promoter group entity AAA Project Ventures Pvt Ltd exercising option to convert the warrants allotted to them in July 2009.
In a regulatory filing to the Bombay Stock Exchange (BSE), R-Infra said that its committee of directors (Allotment) will meet on 7th January to consider allotment at a price of Rs928.89 per share to AAA Project Ventures pursuant to warrant conversion by them.
The conversion price is considerably above the current market price of R-Infra shares, which were trading 1.5% up at Rs869.45 in afternoon trade.
In June 2009, shareholders of the company had approved issue of warrants to the promoter entity. Thereafter, the company allotted four.
On Thursday, R-Infra gained 0.33% to Rs859.50 on the BSE, while the benchmark Sensex declined 0.57% to 20,184.74 points.