High coal, fuel prices crushing Ambuja Cement EBIDTA

Excerpts from CNBC-TV18's exclusive interview with AL Kapoor:

Q: We can sense that your margins have been under pressure perhaps because of coal, could you outline what kind of pressures you faced in this quarter in terms of margins?

A: The industry is going through very unprecedented cost increases and cost pulls, the coal prices have almost doubled, on year on year basis, we were procuring coal at USD 66.5/ C & F, today the price is more than USD 130, C & F and it is almost impacting our margins in a very substantial manner. Fuel is the most important prospect for our operations, if you were to ask me, cement industry either deals primarily with costs or with fuel and power consumption and therefore we are being hard pressed, from all the sides.

In fact with a view of surviving our operations we had to virtually ship 0.5 million tons of extra material during the current quarter so as to negate the unprecedented impact on our bottom line in this particular period our YoY price increase was only 3%, 14% increase in the sales revenue has come primarily through increased volumes which were brought to 4.8 million tons which were 4.3 million tons in the last quarter.

As a result we have been able to float and our net sales have gone up by 17% to Rs 1,655 crore, and our EBDITA has been reduced to 7% to Rs 557 crore from Rs 599 crore as we achieved in the same quarter of last year. Profit before tax has also gone down by 37%, to Rs 483 crore.

The problem is that while the cost increases are going absolutely unabated, on which no body has any control, we have been pressurized to, resort to no price increase, and I would say the industry has behaved very well in the last 12 months when the cost increases in the industry which have been passed on the form of increase in prices, and that has only been in the order of around 3%. What more do you expect from the industry.

The Cement industry has always responded very favourably to the call or the government and in fact if you were to retrace the history of cement industry, it was a first case with experimentation of deregulation, way back in 80's when the capacity of the industry was only around 20 million tons. During all this period, the industry responded so favorably, to the deregulation policy of the government of India, and finally the cement industry was decontrolled in 1989, and till today we have almost built, 185 to 190 million tons of capacity.

Q: So where do you expect prices to remain for the next quarter or so for the cement industry?

A: So far as we are concerned, we share the concerns of the Government of India, that the prices shouldn't go up, but we also assure that we will try to maintain to the best of our ability. The price stability in the market, which we have done in the last 12 months, needs to be appreciated. There are many problems of the Cement industry-if the coal prices keep on increasing, and if the logistic costs keep on increasing because of the high increase in the diesel costs we will be in trouble.

At some point in time, the margins are going to be suppressed to such low levels, that it would be difficult to fund the investors which are already in our pipeline. We would like to mention that Ambuja Cement has projects worth Rs 4,000 crore, which will increase our capacity by 10 million tons, and which are likely to go on stream in the year 2009, we need internal accruals to fund these investments, so there is a need for the government and the industry to sit down  together and in this connection.

I would like to mention that the cement industry is a very high commodity, even if the current year's  budget, if you will recall, the Finance minister increased the excise duty, on bulk and institutional sales, which was earlier Rs 400  as specific costs, to 14% on ad valorem, which meant a very big increase.

The Gujarat government increased the VAT, from 12.5% to 14%, the HP government increased and levied additional goods tax, on transport of cement and clinker, by Rs 40 and Rs 50 respectively, and then on the top of it, the excise duty on clinker, was increased by Rs 100 a ton, which impacted our units both in Uttaranchal, and in Himachal Pradesh, with such unprecedented increases in the tax revenue and coal and fuel costs, leading to the total cost of operation which have almost gone up by 30%.

Our EBDITA margins are bound to be under pressure, but I would suggest, that there is a need for the government and the industry to sit down together, we are the only industry where the excise duty is being levied on MRP and we don't get any abatement.