Lowering of prices to hit profit margins: Shree Cements

HM Bangur, MD, Shree Cements said that the cement prices have begun softening. He added that the profits of the cement companies would definitely come down due to the high cost of raw material and the low sale price. He added that increasing volumes would not help the cause of the cement companies either.

Excerpts from CNBC-TV18’s exclusive interview with HM Bangur

Q: How are we expected to see prices to move the next three months given that some companies have initiated freeze and what is the call on supply given that we are going to be looking at some flow coming in the later part of the year?

A: The cement prices have started softening especially in Central, West and North India. In Gujarat the measures taken by the government on export ban means, a lot of extra cement is now available in Gujarat and this is creating pressure. The cement prices have come down by Rs 7-8 and few companies have said they will not increase the price. Our company has reduced the price by Rs 2-4/bag in North India, by Rs 3-5/bag in Central India and Rs 7-8/bag in Gujarat, so there definitely will be pressure in the future.

Q: Has this been done in response to what the Government has asked the cement manufacturers to do. The word doing the round was ‘price-freeze’. Has the prices indeed been frozen for the next couple of months for cement manufacturers?

A: Not really, if it was frozen then it was fine but we are bringing down the price. Some companies have frozen the price. Different companies will act in a different way, so I cannot speak on behalf of the whole industry as such. Every individual unit will be taking their own decision.

Q: What exactly happens to the financial performance of some of the cement companies because I assume raw material costs are actually moving higher and higher with the way crude has moved. What happens to the realizations for most companies if the prices are moving lower like this and raw material costs higher?

A: Between the December ending quarter and March quarter the profits of most of the cement companies, whose results were announced, have come down. There are two ways in which things are affected; Firstly, the prices are coming down, secondly the costs are going up. So there’s no doubt that between Q3 to Q4, the profits of companies were under pressure and they are down. With the costs increase factored in too, this tendency will remain for the rest of the year.

Q: So for FY09 what is the outlook on financial performance of cement companies, given that a lot of supply is expected to come in the later part of the year, you think what may get hit in terms of realization may get compensated by higher volumes?

A: Not really, higher volumes will not take care of the whole thing. How much hit we will be taking will not be known as the future is totally vague. But one thing is for sure and that is profit margins are going to come down. The profit margins of 2007-08 will not remain in 2008-09.