That sinking feeling
One of the best performing sectors in India’s growth revival is the cement sector. However, the industry is headed for overcapacity and prices are likely to come down. One immediate indication of this has surfaced in Andhra Pradesh (AP). Cement prices continue to remain low in AP since August 2009. Lack of demand and over-capacity has been responsible for this. While cement industry players expect demand to improve, analysts fear it may worsen over the long run.
 
Cement prices fell to Rs170 per bag in August 2009 from a peak of Rs235 per bag in April 2009 in AP. Cement prices continue to remain low at Rs170 per bag since August 2009. A cement industry official confirms that the cement prices for the present day are at a low of Rs170 per bag.
 
While industry sources believe the scenario is the result of low demand due to the floods in AP, it may well be the first indicators of oversupply.
 
In the next three months, analysts believe that prices may fall further in the other regions of India. “Prices are expected to fall not particularly in this region, but also in the remaining regions of India. The prices may fall steadily in the next three to six months,” said Amit Srivastava, research analyst, Karvy Stock Broking Ltd. “There could be a further correction in cement prices,” said R Gurumoorthy, executive director, corporate communications, Dalmia Cement (Bharat) Ltd.
 
In spite of low cement prices, the units in AP have been able to maintain profits due to low operating costs, analysts believe this might prove difficult for the remaining regions in India.“ Other regions are not in a position to reduce operating costs in a similar way as AP,” said Mr Srivastava.
 
Analysts believe the worst affected would be south India, as the fall in prices would be soon witnessed in the neighbouring states of  AP. “The excess supply from AP will be diverted to other regions like Tamil Nadu, Maharashtra, and Karnataka and later to the eastern parts. Thus, an excess supply is expected to occur in these regions.”
While the spokesperson for Dalmia Cement cites low demand and not over-capacity as the main reason for fall in prices, analysts look at it as a combined effect of both lack of demand and over-capacity.
 
“The reason for the fall in prices is not merely a lack in demand but also the overcapacity happening in that region. The prices will not fall so low only due to lack of demand, it is more due to the over-capacity. Even if they operate at 50% to 60% capacity utilisation there is an excess supply in the market,” added Mr Srivastava.
 
“Cement capacity in expected to grow by 8% to 10%. These capacities were planned on an expectation that demand will also grow. Current demand for cement has been driven by spending on IT projects and residential projects. For the capacity addition planned for 2010, the industry needs incremental demand over the existing construction activities in order that total cement demand grows at an expected 10% rate,” added the analyst.
 
Delayed public spending in the form of planned government infrastructure projects has also adversely affected the expected cement demand. “The main factor in the current fall in cement prices has been a delay in the offtake of public spending,” said Mr Gurumoorthy.
 
“There has not been sufficient demand in AP due to delay in expected government housing projects and IT projects. Later, the floods also acted as a spoilsport,” added Mr Srivastava.
 
All over India, 47.5 million tonnes (MT) of cement capacity is expected to be added in 2010 and 19.2MT by 2011. Out of this, the southern region is expected to add around 20MT in the year 2010. For the year 2011, the highest capacity addition of 7.8MT will happen in the eastern region
- Amritha Pillay ([email protected])
 
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Jacking up prices for IPOs
Real estate developers are ramping up property prices in order to get higher valuation for utilising public money as many of them are planning to enter the capital market to raise funds.
 
“It is all a game plan because Initial Public Offerings (IPOs) are lined up. Increase in the prices provides them (the developers) with a higher valuation. All those builders who have not yet been able to capitalise on the booming stock market are jacking up the prices between 10%-15%,” said Pankaj Kapoor, founder and chief executive, Liases Foras, a property research firm.
 
From October 2008 and during the slowdown, all developers had to reduce property prices by as much as 30%. This move helped in some recovery and brought back a little momentum in realty. To take the benefit of the recovery, initially developers hiked prices by 5%-10% to signal the bottom and get potential buyers to stop waiting for a further decline.
 
“As the builders saw demand coming in the market, they hiked up the prices once again for higher valuation and they have killed the market,” Kapoor said.
 
According to market sources, Lodha Developers Ltd has increased property prices by 10% because it sees the company to be valued at about Rs2,500 crore. Nitesh Estates, another developer based in Bengaluru is expected to file draft red herring prospectus to raise Rs550 crore while Sahara Prime City—the real estate unit of Sahara Group is also planning to raise around Rs9, 800 crore and hence has increased the property prices by same percentage. Orbit Corp Ltd and Indiabulls Real Estate Ltd are also following the same footsteps.  All the realty companies are set to raise Rs13,500 crore from markets through IPOs.
Pallabika Ganguly, [email protected]
 
 
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Pay-per-call: Another ‘lose-lose’ move from Tata Teleservices?
The mobile service offered from the house of Tata was never known for aggressive marketing. However, this time around, Tata Teleservices has come out with a plan with the potential to start an immediate price war. Tata Teleservices, which provides CDMA mobile services, has launched a new plan called "pay-per-call", which would charge a fixed amount for a single call irrespective of its duration.
 
Under the new plan, CDMA subscribers of Tata Teleservices would pay Re1 for any local call and Rs3 for calls outside the city, irrespective of the duration. New subscribers need to pay Re1 per day to avail this offer while existing Tata Teleservices subscribers need to make an additional one-time payment of Rs96, the release from the company said. It, however, does not specify how long this ‘special offer’ is valid for.
 
At present the call rates across the industry are in the range of Rs0.50 to Re1 per minute for local calls and Re1 to Rs1.50 per minute for national long distance (NLD) calls. 
 
The new offer from Tata Teleservices, however, is not completely unexpected. According to reports, Tata DoCoMo, the newest entrant in the GSM mobile space, has been receiving very good response from subscribers for its pay-per-second plan, shown by the 2.26 million new additions to its subscriber base in July. Tata DoCoMo’s plan is in contrast with the "pay-per-minute" plans offered by other GSM operators, which may have helped the company to gain a foothold in the crowded mobile services business.
 
About 80% of the new subscribers from Tata DoCoMo could be subscribers switching from existing operators or using multiple SIMs or handsets. New launches initially focus on high-ARPU penetration geographies and therefore are less likely to acquire first-time users, says Motilal Oswal Securities Ltd, in a report.
 
 
Minute-based billing results in granularity benefit of about 15% to 20% for operators, but Tata DoCoMo has been passing on the same to subscribers, in order to gain market share. Other operators however have not replicated the pay-per-second billing plans.
 
 
So the question remains, why has Tata Teleservices introduced this new pay-per-call offer? One reason is to increase and retain its CDMA subscribers, who were likely to shift to Tata DoCoMo's pay-per-second plans. Second, as per the new spectrum criteria decided by the Department of Telecom (DoT), the spectrum an operator can get would be decided by the number of its subscribers, which has been forcing the operators to make an extra effort to retain subscribers or inflate the subscriber numbers.
 
 
India's mobile user base has risen 25 times over the past five years and research firm Gartner expects it to touch 737 million by 2012. In July, a whopping 14.38 million wireless subscribers were added by mobile operators taking the total wireless user base to 441.66 million in the country.
 
 
"Tata Teleservices' new offer is likely to be a loss-making one. Since interconnect cost per minute is Rs0.20 for local calls and Rs0.60 for NLD calls, Tata Teleservices stands to lose money, once the call duration exceeds five minutes," says Anand Rathi Financial Services Ltd, in a report.
 
 
"The daily fee from new subscribers joining Tata Teleservices or the one-time payment from the existing subscribers would not materially alter the economics of this offer,” the report added.
 
Officials from Bharti Airtel, India's largest mobile services provider, were not immediately available for comments.
 -Yogesh Sapkale with Pallabika Ganguly [email protected]
 
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