Monsoon hit sales; see 6% demand growth in FY14: JK Lakshmi

Early onset of monsoons and low demand has hit sales volumes in June says Shailendra Chouksey, wholetime director, JK Lakshmi Cement. In an interview to CNBC-TV18, Chouksey says rural demand will pick up post the monsoons.

He says the company can grow around 5.5-6 percent. However, he has ruled out the possibility of any price correction in the products.

"With heavy dependence on rail, the surge in the railway freight increase has definitely impacted the costing of both the input and the output. Hence, it has already put lot of pressure on the pricing," he adds in an interview to CNBC-TV18.

Below is the edited transcript of Chouksey's interview to CNBC-TV18.

Q: This time around we have seen a bit of an early offset of monsoon, has that impacted the optic that you have seen and the kind of sales numbers that you have seen for this particular month?

A: Yes. June certainly has seen a drop in the lifting and it is not simply the monsoon, monsoon of course has been a catalyst for bringing down the demand, but the overall slowing down in the construction that we have been witnessing for last one year and it continued in April-May.

April saw a slight bit of lifting. Industry saw a growth of about 8 percent but in May it dropped down to about 3 percent on all India. However, if one was to segregate region wise the areas where we operate like north, west, certain part of central, there we have seen demand going down to practically a flat growth and in June we have seen a negative growth. Hence, it is a continuation of the slowing down and monsoon has been the trigger as far as June is concerned.

Q: Therefore, if you have to estimate FY14 growth what would it be? You will probably get some relief from rain driven rural demand but as a whole how would you estimate volume demand for instance?

A: A lot will depend on the monsoon. We expect the monsoon is going to be normal and good. The rural demand would pick up, some of the service sectors should also pick up and therefore one could expect certain growth. Not the sort of buoyancy that we saw pre 2010-11, but we could reach somewhere around 5.5-6 percent growth that is to my mind too optimistic. However, if that doesn’t happen, then the infrastructure sector being where it is, the overall realty sector being where it is, then of course one could see it on fairly negative terrain.

Q: What about pricing, how much more decline can we see in pricing because this year we have seen 5-10 percent decline in prices? Is there more room on the downside or you think that is caped now?

A: I don't think we really have a room to go down further. We have not been able to even pass on the steep increase in the railway freight and other freights that we have witnessed. If one recalls, there was a very steep hike in the diesel price for the bulk consumers over 25-27 percent resulting in the railways hiking their freight by over 22-24 percent. So, that is a very serious impact as close to 50 percent of the total cement output and close to 40-50 percent of the inputs are being dependent on the rail. So with this heavy dependence on rail this surge in the railway freight increase has definitely impacted the costing of both the input and the output. Hence, it has already put lot of pressure on the pricing.

Q: Therefore, how much more hit may happen on your margins? We have to price in continued increases in many administrative costs all the way up to the risk of gas prices in April 2014, electricity price hikes can also not be ruled out as diesel prices continuously go up. And more importantly yesterday we got that disturbing revelation that the railway wagon orders for last year itself have not been tendered, this year’s orders have not been tendered. Do you see a problem in terms of availability of coal and the ability to reach cement, these putting some kind of margin pressures?

A: If we are switching over to more costly options of transportation, the cost would increase further. However, I do not really see the legroom available for the industry to resort to it. Hence, I will not be surprised if the volumes suffer. We simply don't have much of legroom to switch on to the alternative, costly mode of transportation. So, we are in quite a cash tentative situation right now and only a pickup in the demand and rains continuing uniformly could be a saviour.

Q: Give us an outlook for FY14 in terms of your capex plans, in terms of what you expect as far as top line is concerned?

A: We are right now in the midst of substantial extension programs. Our capacity last year was about 4.7 which now is about 5.6 million tonnes. We have taken one green field project and we are also rehabilitating close unit in Rajasthan, Udaipur cement works. So right now, we have taken up over Rs 2500 crore of expansion of which we have already invested over close to Rs 1600 crore. In this financial year we will be spending something like Rs 650 crore and in FY14-15 it will be another Rs 600 crore. So, by FY15 we would have completed expansions worth Rs 2700 crore which will take out capacity to close to 10.5 million tonnes.

Q: Your interest expenses were down to Rs 18 crore from Rs 21 crore in last reported quarter. Would that trend continue?

A: That may not continue. There was some interest income also out of the cash accruals that we had. We had over Rs 500 crore liquidity position and that was deployed in some of the mutual funds. But now, cash accruals are being deployed for our expansion as per the capex plans. So, that may not remain for next two years.