North Indian cement units might suffer due to a spill-over effect

Cement producers in north India expect demand to improve despite fall in prices while analysts believe demand will be unable to meet the oversupply in the market

Cement manufacturers from northern India are confident that there would be continuous demand following projects related with the Commonwealth Games, infrastructure and housing and the rates will go up. However, analysts feel that a spill-over additional supply from other regions may leave North India’s cement producers disappointed.

Cement prices in north India have already fallen by Rs10 to Rs15 per bag in the past month. Following the end of the monsoon, cement manufacturers are expecting increase in demand. Next year, there would be the Commonwealth Games in New Delhi which needs newer stadiums, bigger roads, hotels and other infrastructure. This will also boost the demand for cement. While agreeing with the demand scenario, analysts are sceptical about possible price increase.

“We expect cement consumption growth in India to remain strong, with the thrust on infrastructure and strong demand from rural housing. However, huge capacities that are expected to come on stream in the second half of FY10 are expected to exert pressure on the cement prices. We expect these additional capacities to fully ramp up over the next three-four months and eventually exert pressure on cement prices,” said Angel Broking Ltd in a report.

According to an Edelweiss Consumer report, cement prices were down in Lucknow by Rs80 to Rs100 per bag from peak prices of Rs325 per bag. In Kanpur too, prices are down by Rs10 to Rs15 per bag and further pressure is expected. Currently, only the National Capital Region has been unaffected by a fall in cement prices as there is a strong demand. This strong demand however, is matched by supply, the report said.

"Even if the demand for the region may go up, there will be a pinch on the prices due to supply. In the north the prices have fallen by Rs10 to Rs15 per bag in the past one month. It may be delayed by two to three months, but this is going to be there. Now the expectation is that demand will improve after the end of monsoon and the holiday season. They expect more demand from the Commonwealth Games also. This is what is likely to drive the demand for cement. There is also a bounce back of Rs5 per bag," said Amit Srivastava, research analyst, Karvy Stock Broking Ltd.

A further fall in cement prices in north India is likely to be witnessed in the next three to six months due to a spill-over effect from other regions of India. This is likely to be evident in the fourth quarter of 2010.

Emkay Global Financial Services Ltd in a report said, “We agree that given the surplus cement scenario in FY10 and first half of FY11, cement prices are expected to remain under pressure. We also agree that given the negative news flow in the short-term, the sector is likely to underperform. However, we would like to reiterate our medium- to long-term positive view on the sector given that the declining consensus earnings already factor the softening cement price."
Mr Srivastava added, "Ultimately, when we look at the larger picture of the country, then we believe it is not only about the north Indian part, there will be a supply from other parts of India. There are certain supplies coming from the eastern part, the western part and other parts of India. Supply from the regions where demand is not so good, will be diverted to the Northern region. The northern region is already increasing capacity in lieu of higher demand. On a larger scale, we thus believe that prices will fall. This further fall in cement prices is likely to happen in the fourth quarter of 2010."

Though there have been bounce-backs in the prices by around Rs5, both in north India and south India, analysts believe it will not help in the long term.

"There has been a fall in prices in southern India; we thus expect a bounce of back of Rs5 to Rs10 per bag, though this will not last for a longer term," Mr Srivastava added.

Officials from Shree Cement Ltd, one of the key players in north India, were not immediately available for comment.
-Amritha Pillay [email protected]

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    Tariff war leaves mobile operators bleeding

    These days every other GSM mobile services provider has been bit by the lower tariff bug. The "pay-per-call" and "pay-per-second" initiative by Tata Teleservices has forced major players like Bharti Airtel and Reliance Communications (RCom) to join the tariff war. The latest to join the war is Idea Cellular, which is offering call rates as low as 40 paisa per minute.

    While this is great for consumers, but the real question is, can these companies really afford it? And if yes, then at what cost? During the April to June quarter, all GSM mobile service providers have reported a fall of about 8% in average revenues per user (ARPU) while their total revenues increased marginally by 2.4%.
    Following the launch of its GSM services and new plans, Tata Teleservices is gaining in terms of subscribers. Although, earlier, almost all players termed Tata Tele's tariff plans as a marketing "gimmick", now everyone is feeling the heat. Despite offering a reduced tariff plan, Bharti Airtel, the country's largest telecom services provider, reported a 10% drop in net subscriber addition in September. This is the highest month-on-month decline for Bharti Airtel, after March 2005, when its net subscriber addition fell by 22%.
    According to Anand Rathi Financial Services Ltd, the decline in net additions may have been a key factor behind the sharp tariff cuts announced by Bharti Airtel in late September under the ‘Airtel Advantage’ scheme.
    "We estimate RCom’s 50 paisa flat outgoing rate plan to generate 40-45 paise average revenue per minute (ARPM), including SMS, value added services (VAS), benefit of 60 second pulse and customer inertia and expect Bharti would be able to charge a 5%-10% premium given its superior branding, coverage and distribution," the brokerage added.
    The quality of earnings would continue to deteriorate as the share of high margin 'monthly rental' declines and minutes of usage (MOU) and ARPMs decelerate at a higher rate. "While the industry has witnessed ARPM declines in the past and has been resilient through MOU increase, this time we anticipate lower MOU elasticity, if any, as well as higher churn management expenses and pressure on post-paid revenues,” said Enam Securities Pvt Ltd, in a report.
    Enam said it believes that lower capacity expansion and creation and industry consolidation are eventual outcomes in the long run.
    Besides Bharti Airtel, the players that would feel the maximum pressure of the tariff war are RCom, Vodafone Essar and Idea Cellular. All these mobile services providers, except RCom have witnessed about 10% drop in net subscriber additions in September. During the month, Bharti Airtel added 2.5 million subscribers while Vodafone-Essar and Idea were able to add 1.9 million and 1.4 million subscribers, respectively.
    "Deceleration in Idea's financials would be much higher due to lower incumbency advantage, lower ARPUs and lower EBITDA percentage compared with Bharti," Enam said.


    The tariff war started by Tata Teleservices will also affect new entrants in the mobile services market. According to a report by Motilal Oswal Securities Ltd, EBITDA break-even timelines for new entrants continue to stretch because of tariff pressures as relative tariff stability is critical for new operators to achieve break-even but pricing innovations targeted at increasing visibility are likely to continue. Competitive pressure and prospects of spectrum sharing/in-circle roaming could make new entrants reduce capacity expansion outlays, the report added.
    -Yogesh Sapkale [email protected]
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    The reality in realty

    Vested interests in the real estate market are falsely spiking property prices. Developers and broking firms are creating a false bubble by exaggerating the improved market sentiment

    The convergence of vested interests of a few developers, media houses and broking firms is creating an exaggerated bullish atmosphere in the real estate market. While realty prices have indeed moved up, builders themselves are shocked at the extent of rise claimed by the media.

    “Some newspapers have been reporting that our rates for the‘Global City’ residential project at Virar have gone up from Rs 1900 per sq ft to Rs 2700 per sq ft but actually our rates have only risen from Rs 1900 per sq ft to Rs 2100 per sq ft because the building is in the process of completion,” said Boman R Irani, chairman and managing director, Rustomjee Builders. 

    He also added, “There is no steep spike in the rates especially by credible developers who have got a brand name and brand image to protect.”

    Our sources say that property prices have only increased in South Mumbai by 10% - 25%; elsewhere in Mumbai the prices have just started moving up. According to bankers, prices of residential properties across the country are still down by 15%- 25% from their 2008 peak.
    M D Mallya, chairman, Bank of Baroda said, “There is a brisk sale of flats in the Rs22 lakh-Rs25 lakh range.”

    KV Kamath, Chairman, ICICI Bank, said, “People have curtailed the size of home loans and the 20%-30% drop in price has certainly made 800 sq ft-1000 sq ft apartments more popular. That seems to be the new mantra.” He also added, “People are not buying today on the basis of future income.”

    Since the past four months, real estate developers have been raising funds through Qualified Institutional Placements (QIPs) and through Initial Public Offerings (IPOs) or follow-on issues so that they can complete old projects which were stuck since November 2008.

    Companies like Unitech Ltd, Indiabulls Real Estate Ltd, Housing Development and Infrastructure Ltd, Sobha Developers Ltd and Orbit Corp Ltd have raised funds through the QIP route. Developers such as Emaar MGF Land Ltd, Nitesh Estates, Lodha Developers Ltd and Sahara Prime City are planning to raise a total sum of around Rs9,800 crore through IPOs—Sahara Prime City has filed its draft prospectus for Rs3,450 crore, Emaar MGF Land Ltd for Rs3,850 crore (down from the Rs6,400 crore it planned to collect last year). Ambience Ltd, a Gurgaon-based developer has filed a draft prospectus with BSE to raise approximately Rs1,125 crore. 

    Brokerage firms and investment bankers want to create a scenario which depicts a booming market. Angel Broking in a recent real estate analyst report said that some of the developers have increased their prices by 30%. Industry sources say this is exaggerated.

    “Speculative buying is not taking place but a pent up buying (demand) is coming back to the market,” said Pranay Vakil, Chairman Knight Frank (India), a property consultancy firm.

    He also explained, “Since the past eight months people had resisted from buying, thinking that prices may go down further. But now they have realised that there will be no fall in prices or interest rates, so we are seeing a demand in the market. The demand is one year old.”

    Renu Sud Karnad, joint managing director, HDFC Ltd, said, “There is a lot of demand from first-time house buyers. There is a good demand for house prices in the range of Rs30 lakh-Rs50 lakh in metros and about Rs20 lakh to Rs25 lakh in smaller towns.”

    She also added, “In India the housing shortage is huge. Therefore in the long run it is important for the developers to focus on affordable housing and see that the property prices do not rise sharply resulting in customers being priced out of the market.”

    Many developers believe that fake hype about prices will hurt buyer sentiments. In the long run if the prices keep rising, a lot of customers will be priced out of the market.
    –Pallabika Ganguly [email protected]

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