Will monsoons wipeout cement stocks? Experts answer

3258 Investors following Binani Cement. Share this News with them.

0

Like this story, share it with millions of investors on M3

Will monsoons wipeout cement stocks? Experts answer

In an interview with CNBC-TV18, Mohan Krishnaswamy, Head of Equity Research from RBS Equities (India) and Vinod Juneja, MD (Group) of Binani Cement gave their outlook on the cement and construction sector.

Post your opinion here

 

0

Tweet

Share on Tumblr

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about Binani Cement See previous management interviews See what other Experts & Brokerages are saying about Binani Cement Binani Cement BSE | NSE 01/01/70 Are Mutual Funds betting on Binani Cement?

Couple of cement stocks have been under pressure for last couple of days. The government is studying the companies whether they have some sort of cement cartelisation. In an interview with CNBC-TV18, Mohan Krishnaswamy, Head of Equity Research from RBS Equities (India) and Vinod Juneja, MD (Group) of Binani Cement gave their outlook on the cement and construction sector.

Below is the verbatim transcript of the video. Also watch the accompanying videos.

Q: Reports say that the cement cartelisation is being looked at. Experts have been saying that it looks like there is an artificial inflation of cement prices. What would be your comment on that?

Juneja: I totally disagree. As far as cartelisation is concerned in the cement industry, we as a company are not any part of cartelization or syndication. Cement is purely a commodity which has a demand and supply concept like any other industry. There has been a recent update where Union Environment Minister Jairam Ramesh has put an all India ban on taking out sand from river belt. Just like this, there is a new problem for cement everyday. Coal prices, energy prices and logistic are an issue. There is nowhere a question of cartelisation. Cement industry is not trying to rig up the price; instead they have been trying to give the best price available to various sectors like housing and infrastructure sector. As far as Binani Cement is concerned, we are producing about 93% of our capacity which is highest from last three years.

Q: What is the current capacity utilisation?

Juneja: Binani Cement's total capacity in India is 6.5 million tonne in Sirohi and Neem Ka Thana. Our capacity outside India is in China, Dubai, Mauritius. All our stocks have been sold out. Our overall capacity utilisation in cement industry is between 80-85% because there is a maintenance period.

Q: What are the kind of ground reports are you getting? We are all talking about paralysis in governmental decision making. Infrastructure companies have spoken about it in the past. What's your sense that cement demand is not at all matching up to the capacity in the system?

Krishnaswamy: Last year, we saw the demand slowdown to about 5-5.5% in end of March. That trend has continued into this year as well. Contrary to expectations, the cement demand has not picked up. This is a combination of lot of factors, not only the infrastructure sector which has seen delays in execution; but also from the real estate stand point, there is some slowdown and new start ups in metros. In rural India, there has been a bit of slowdown in demand by farmers who are diverting there resources for land acquisition. We have been seeing about 5-6% level of growth this year. It comes in particularly at a time when new supply is ready to produce which has an impact on prices. For last few weeks, we have seen prices strip down.

Q: Would you say that for next three-six months, there will be absolutely no pricing power with cement companies and the stocks would continue to underperform?

Krishnaswamy: That's a fair assessment. Right now, we are in the monsoon months where seasonally demand tends to be weak. The industry has been facing the impact of the higher coal prices in this quarter. Pricing will be an issue because of demand supply imbalance. Industry has faced lot of cost escalations on the taxation front. The margins would not improve from the fourth quarter. In fact, the margins could tend lower in the next couple of quarters.

Q: What is your estimate of any new capacity coming into the system in FY12? What kind of demand growth you are factoring in while you analyze cement companies? What is the kind of capacity in the system? Would you see fresh lows in those cement stock prices?

Krishnaswamy: Right now, the capacity is over 300 million tonne. There is about 15 million tonne more expected to come in FY12. The incremental demand typically should be about 20-22 million tonne at least at a 10% level. If you are operating at 5-6% demand growth, it tends to become much slower at 10-15 million tonne. The oversupply conditions will persist and probably prolong into FY13 as well. The pricing power will be difficult for manufacturers in these situations.

Q: What's your assessment of the current pricing? If you compare the current prices to last year at the onset of monsoon, what's been the change as far as the pricing trend is concerned?

Juneja: For the second quarter, there is some impact on the prices. Cement has become a local product. For example, Northern India has not yet seen monsoon. Monsoon might come in another week to 10 days. The cement price has been down by Rs 3-4 as far our company are concerned, in the last same time. Government of India recently announced 52 major projects coming up for the spending to come-in. The cement prices might go up in future.

Q: How much have costs gone up for you year-on-year (YoY)?

Juneja: In the cement industry, there are two major cement inputs costs - logistic and energy. Considering both, the energy and logistic cost, we have a real impact of about 4.3-4.5% compared to last year. Petroleum and coal prices have gone up. Railway has increased the freight. The cement industry's infrastructure is not entirely dependent on rail. Almost 50% goes for the road. If you these two costs, it is about 34-36% of the cement industry cost.

Q: In your estimate, what has been the rise in cost? Coal will have an impact on the cement companies. What is your estimate of the extent to which the costs have risen? Through a better part of FY12 and early FY13, would you think that the industry will not be able to recover it in through higher prices?

Krishnaswamy: Adding to the cost inflations is the excise increase which happened in the budget. There was some marginal increase of Rs 2-3. Depending on each company, the coal increase would be Rs 3-5. There is a cost push which on a per bag basis could be Rs 8-9 for companies. Obviously the pricing tends to be seasonal and regional. At this point in time, there is a bit of weakness in almost all markets where there is monsoon, except South India where prices are holding up. We think the margins could drift lower from the fourth quarter levels into FY12.