Heidelberg sees cement prices going up by Rs 75/bag ahead

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Ashish Guha, managing director and chief executive officer of Heidelberg Cements in an interview to CNBC-TV18 said that rise in fuel and power prices has hit the company's earnings in this quarter.

The company has posted a net loss of Rs 8.2 crore for Q3CY11 as against net profit of Rs 2.8 crore year-on-year. "Coal went up by about 35-40%, power by 20% and distribution expenses by about 10%," he added.

Guha expects cement prices to jump to Rs 325-35- per bag from Rs 250 per bag.

Below is the edited transcript of Guha's interview with CNBC-TV18. Also watch the accompanying video.

Q: Can you tell us about the earnings performance? This is another quarter where companies like yours had face lot of pain. How many more quarters do you think this will continue? Where you will continue to see depressed earnings?

A: It is difficult to say. Last time I was talking about significant price increases. We have seen some price increase after the monsoon period but we are far away from where we should be. Input cost on everything that we touch is higher.

We have tried to better our consumption parameters in most respect and are trying further to reduce them. We can't do anything about coal prices going up shortage of power and coal. We are in a situation where external world is pretty unkind to us.

Q: Which are the specific costs that went up considerably for you?

A: Both fuel and power prices went up significantly and each raw materials ranging from 10-20% for various raw materials. Coal went up by about 35-40%, power by 20% and distribution expenses by about 10%.

Q: Would you expect margins would at least turn positive in the current quarter?

A: It's too early to say anything. We have just passed half of a month. We have seen some price increases in some markets but we have yet to come back to levels where we were in terms of margins of 2009. We are far away from there.

Q: What about cement prices because although there has been a little bit of a recovery its nothing in comparison to the kind of depressed levels we have seen for so long especially in central India. How do you see the prices move from here?

A: I have been crying from the roof top that we should have more increases in prices but ultimately the customer has to buy. I expect some kind of improvement in prices over the next few months. But having said that we have been expecting price increases for the last six months which we haven't seen so far.

Q: Can you size up the demand for us? You see a resistance everytime prices are pushed up, what would you say would be the demand growth for cement as an industry in this year?

A: This year so far till September it is between 5-6% which is far below normal. On a normal basis when there is no infrastructure impetus etc, cement usually grows about 1.2% of GDP. That's a correlated factor between 1.1 and 1.3. If we take GDP even at 7.5%, growth should be in the range of 9% which hasn't happened in the first nine months of this year.

We expect some infrastructure impetus to push it up. When infrastructures spend is huge like in India which hasn't happen but we are all talking impetus on infrastructure then that should go up to 1.5 times GDP growth. So we are languishing there.

Q: What was the capacity utilization and is the profitability so bad that you would be vary of adding to your capacity any time soon?

A: We are already adding capacity so we should be bringing in tinker in the first quarter of 2012. As a strategic investor and a long term player in the Indian market we are not vary of adding capacities. We are doubling our capacity from the current 3 million to 6 million tonne. We will be 5 million tonne in central India from the current 2 million tones.

Ultimately I don't see major capacity buildup coming up in India because margins are so low that no projects will give any kind of returns based on today's scenario. Other raw material prices have gone up and cement prices should increases significantly.

I am not talking about small numbers; cement prices should be in the range of Rs 325 to Rs350 for major projects to come out with raw material cost and uncertainty about coal, supply prices going up. From the current levels of Rs 250-260 they should go up to Rs 325-350 for major projects coming up hereafter. It is a chicken and egg situation, which comes first? Unless prices go up I don't see major projects being built up in India.

Q: What about the realizations for this quarter? What have they stood at? What kind of average realizations you could do for the entire year?

A: We are around Rs 2,700 give or take Rs 50 that's a kind of realization. Realization has grown by 4% and costs have gone up by 12%. So that's where margins are vanishing.

Q: Realistically how many more quarters of a loss are you expecting to see before you break into the black?

A: I hope we don't have any further losses any quarter. This is a record loss that we have ever had.