Margin may decline in Q3: JK Lakshmi Cement

Reports suggest that cement prices have been increased by about Rs 15 per 50 kg bag in Gujarat. Bulk cement prices will also be raised from January. At the moment, retail prices have been raised.

Cement: Unusual December, price decline continues

In an interview to CNBC-TV18, Shailendra Chouksey, wholetime director of JK Lakshmi Cement says the cement prices had seen a dip in the previous two-three months. "They have been continuously declining. In most of the places in North and Gujarat, the prices had gone below the economic level. I think the price increase was most expected," he adds.

According to him, in the first half, operating margin was about 23 percent. "Since this year we have seen a swapping of Q2 and Q3, the second half would probably see a decline. In the Q3, the volumes have been less, the prices have been less. Since the quarter has not yet ended, I would not hazard a guess, but definitely the operating margins would be much below in Q3," he elaborates.

Below is the edited transcript of his interview on CNBC-TV18.

Q: Have cement prices been raised at any point in the Western and the Northern markets?

A: The cement prices had seen a dip in the previous two-three months. They have been continuously declining. In most of the places in North and Gujarat, the prices had gone below the economic level. I think the price increase was most expected.

The prices started declining somewhere in September end, which normally do in July-August, when the rainy season comes. This year because of the delayed monsoon, the decline started somewhere in September. They continued well up to now because immediately after the monsoon, we had the festival season.

Normally, January-March is the highest growth quarter in cement industry. So, I think a price increase was imminent to come back to atleast an economic level. And then maybe going forward, hopefully, depending on the demand and supply, the prices may go back to what level they prevailed in July-August.

Q: About Rs 15 for a 50 kg back have already been raised? Can you confirm that figure for us? Given the kind of demand pool we expect in next quarter, January-March, how much more headroom do you see for cement prices to go up in the Northern and the western markets where you operate?

A: The prices have declined in the last two-three months by close to Rs 30-35 a bag. So, I think there has been an increase of Rs 10-15 in different markets. There is no uniform price increase. I think the prices are dictated more by the demand-supply in different markets. I think it is a very localise decision. But I am told that two days back there has been an increase of Rs 10-15 varying in different markets. So, I think it is still way below the prices which prevailed in August and beginning of September.

Q: Have you raised it only in the Gujarat market? Is it only at the retail level? Should we expect more price increases at the bulk level in January?

A: Right now, we have seen a price moving upwards in Gujarat because there the demand has picked up first. North is yet to see the demand getting back in its place. So, I am not too sure as to when the price would move in North. But normally by second week of January, the demand picks up. Once the Makar Sankranti comes around January 13-14, I think that is the time when one can reasonably expect some upward price movement in North as well.

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Q: What is the expectation in terms of margins? What were your margins in the first half? I understand you could manage upto about 22-23 percent in terms of margins. How will it pan out in the second half? How has it panned out so far in Q3?

A: In the first half, we did achieve operating margin of about 23 percent. That is quite healthy, considering that second quarter normally is not so buoyant. But since this year we have seen a swapping of Q2 and Q3, the second half would probably see a decline. In the Q3, the volumes have been less, the prices have been less. Since the quarter has not yet ended, I would not hazard a guess, but definitely the operating margins would be much below in Q3.

In Q4, much would depend on how the demand moves up. There are a lot of expectations that demand would pick up, considering the recent pronouncement of the government with respect to the infrastructure. If those things take place, I think there should be a bouncing back of the demand, which has been practically a flat growth in Q3. If that happens, I think we should see the margins somewhere close to what we have seen in Q2. It is still way off.

Q: For that to happen, what prices should one expect? You said that prices are much lower as compared to what we have seen in the first half. If your margins are to stabilise at levels you have seen in Q2, how much more price increases would you need?

A: We have seen a decline of close to Rs 30-35 a bag in some markets. In some of the bulk order, we are seeing the prices going down by as close to Rs 35-40 a bag. So, there is lot more milestones to be covered in terms of the pricing. As I have been repeatedly saying much would depend on how the demand picks up because the prices would definitely depend on how the demand shapes up in the coming three months.

Q: What are your expansion plans? How do you think FY14 will pan out? Being in the industry you have a slightly better idea of projects that are coming up, how do you think the demand-supply equation will shape up for FY14, going by what you already know?

A: We take demand growth of 8-9 percent, which is quite reasonable, considering the fact that it is the compounded annual growth rate (CAGR) growth that our zone has seen in last 8-10 years, if not very buoyant. On a normal expectation of 8-9 percent growth in North and Gujarat, I would expect that the demand-supply would be quite balanced in the FY14. I think that would mean the prices to hover around Rs 200-300 per bag in different markets. That should give an operating margin, for most of the players, between 20 percent and 22 percent in FY14. That is the best guess that I can do.

Q: What about capex plans? How will you look like in FY14 and FY15?

A: Many of our projects are expected to come up by end of FY14. So, I think, in FY14, we should see a volume growth of 8-10 percent in terms of our cement production, in terms of our clinker sale as well as our concrete sale. With improved pricing scenario as is expected because of a healthy demand-supply situation, I think FY14 should be good for our company. We will be doubling our capacity in FY15 with Durg coming up by March 2013 and July 2014 would be Udaypur. So, I think by July 2014 we would be over 10 million tonne as against our 5.3 million tonne at the moment.

Q: There is consolidation happening in the industry. We have had a lot of newsflow about big groups wanting to exit some of the cement plots What is going on in the industry? How do you see the way forward for the cement space?

A: I think cement industry has always had these rumours of a lot of units wanting to sell. But we have not seen that sort of a consolidation in the Indian cement industry as compared to the consolidation taken place in the west or other countries where normally not more than 6-7 players exist in one country.

In our country, there are more than 57 players and with 120 plants, I think we are still very much fragmented. So, there is always room for consolidation. But considering the fact that the cement industry is now finding very difficult to expand on Greenfield site because of the mining issues, land issues, I think I believe that the asking rate of the people who are wanting to sell are very high, when there are not enough buyers at that level. It is a very capital intensive industry. So, I do not believe that a lot of merger or acquisition would take place. There would be one-two here and there, I do not go much by these rumours.