Can hike in cement prices delay double digit demand growth?

The one sector that has been performing reasonably well over the past several weeks has been the cement sector. Summer and pre-monsoon are normally always a good time for cement stocks and cement companies to perform well.

In FY11, the industry witnessed a steep fall in margins. The demand slowdown coupled with the inability of cement players to pass on rising costs led to drop in margins. Profitability has shown some improvement in FY12 and there has been a marginal improvement in the margins despite the rise in costs.

Sudhir Bidkar, the chief financial officer of JK Lakshmi Cement says realisations have improved now and have been higher in the current quarter by about 10% from what the company has been able to achieve overall in the first nine months. “With prices increasing further, we can pass on these higher operating costs to customers now,” adding that he is expecting double digit growth in demand in FY13.

Sanjay Ladiwala, president, Cement Stockists & Dealers Association of Mumbai tells CNBC-TV18 that he sees prices consolidating during the April and May period. Unlike the last quarter, he is optimistic that prices will not jump again.

Ladiwala says the mismatch in capacity utilization is in the South where most of the capacity is installed, but the demand is the least. “South India capacity utilizations at mere 60-70%,” he adds.

Below is an edited transcript of their interview. Watch the accompanying videos for more.

Q: How much of a price hike has been taken up until March 31? How much more can be taken in this quarter by the cement companies?

Ladiwala: In the last quarter, that is January to March, we have seen increases ranging from Rs 40-50 in most regions. However, we have seen a much substantial jump in the Eastern sector where the prices have gone up about Rs 110 to be precise. The West and Southern regions have steadied by about Rs 40-50 and that’s where they are consolidating as of now, given that April-May being the peak months in this period.

The prices are not likely to jump up the way they have in the last quarter. In fact, there might be certain corrections in certain regions and mostly consolidation at the current levels, which are I must say very remunerative.

Q: Has the cement industry now reached a kind of neck and neck or their pockets of under capacity utilisation?

Ladiwala: Overall, the capacity utilisation is far below par. We are talking about 74% capacity utilisation which we have seen in the past going up to 95% plus. So, it is much below the possible available production levels that we are looking at today. There is an over capacity situation, there is no doubt about it but this being the peak period and from January to May the demand normally being quite heavy we are seeing prices being supported by demand. So capacity utilisation has not yet reached its peak.

Q: Can you just divide this geographically? Where is the capacity utilization less and where is it more at par?

Ladiwala: The least capacity utilisation is in the South where most of the capacity is installed, but the demand is the least. The biggest mismatch in the demand-supply situation is in the South. Therefore, that is where capacity goes down to about 60% odd also. So, we are seeing least there and the maximum capacity utilisation is in the North.

Q: Take us through your capacity utilisation because we understand there are reports that you all are currently at nearly 100% capacity?

Bidkar: For the year ended March 2012, we have been able to notch up our capacity utilisation of 100% for the company. Our capacity is 47.5 lakh tonne. We have been able to produce around 47 lakh tonne of cement and so 100% capacity utilisation is what we have been able to achieve.

Q: How exactly are you doing on the realisation picture because the February realisations had hit an all time high. How exactly are you panning out on that front?

Bidkar: Our realisations have been higher in the current quarter by about 10% from what we have been able to achieve overall in the first nine months. Realisation has started picking up in the third quarter of the current financial year and then they continued in the fourth quarter. So realisation has been robust and that has been partly because of the cost which we have been able to pass on to the consumers in the fourth quarter.

Especially after the railway announced a 20% increase in freight in the month of March, we have been able to pass on some cost increase thereon. So the realisation has been pretty good.

Q: How are things panning out in terms of capacity utilisation versus demand? Are you beginning to sense that demand now is coming up to capacity especially in the markets that you work?

Bidkar: Yes. In the first six months of the last financial year 2011-12 it had been very low. Demand was only 5%, but after Q3 starting October, there has been a spurt in demand which has been almost double digit. So, overall, we ended the year with around 7% demand in the year 2011-12.

So that double digit demand, which was there in Q3 and Q4, is expected to continue until about June. Thereafter there are the monsoons so there maybe some sluggishness in the demand. Again, we expect after the monsoon the demand should pick up. So double digit overall demand growth we expect, barring the monsoon quarter, which is the Q2.

Q: Is that your sense that the capacity will keep pace with the demand and therefore there is not going to be that much of an elbow room to push up prices except during certain seasons?

Bidkar: In cement, there is regional disparity. In the North, the demand-supply mismatch is not that much as it is there in the Southern region so the possibility of the cement companies to pass on the cost increase will be there much more in the Northern region as compared to the other parts of the country.

Q: What is the situation in terms of supply-demand and prices in the Eastern sector?

Bidkar: In the Eastern sector, the demand is certainly robust but because of the low supply there, the demand-supply mismatch is the least there. We in JK Lakshmi Cement are planning to put up a plant in Durg of 2.7 million tonne which will take our capacity to 8 million tonne by October next year. That plant will cater to the eastern demand and also to Central India so we want to capitalise this demand-supply mismatch in the Eastern region as well. Other players are also coming in but we hope that we will be the first entrant in that region to capitalise on that mismatch.

Q: What is the update on the buyback of the company? Also, what can we expect on margins in FY13?

Bidkar: We announced the buyback in February. On February 7 was our board meeting and after the statutory SEBI clearance, we could start the buyback only in the last week of March. We have been participating at a moderate level. So right now the volumes have been low and that’s why there has not been much pick-up as far as the buyback is concerned. But margins as far as FY13 are concerned we expect overall for the year to be at the same level as for March FY12 but that will all depend on how the demand tapers down in the coming year.

With the Reserve Bank of India reducing the repo rate and with the impact of that on interest rates, we expect some improvement in the demand both from the housing and the infrastructure sector which augurs well for the cement sector. Once that goes through and demand goes up by about 9-10% we expect the margin to be at the same level as for the financial year ’11-12. 

Q: You were speaking about capacities coming in and almost matching demand on a pan India basis. In which regions would you expect the mismatch to continue and where may there be oversupplies?

Ladiwala: The worst case is going to be with the South where there is more capacity coming on albeit not too much, but the situation is already lopsided. The equilibrium between demand-supply is very lopsided. We are going to see maybe a worsening situation in the South more than in the North and there are a lot of projects coming on in the North, which will boost the demand. So region wise there is a demand increment mismatch, which is going to be much more in the North, which will absorb that additional capacity. So, it’s going to be South which is going to be more under pressure.

Q: What about raw material supplies, coal in particular? Would that be a constraint or has that been a constraint in the past six months?

Bidkar: At JK Lakshmi we have not been using coal. We are dependent more on pet coke and fortunately for us there has not been any disruption nor has there been any steep hike in pet coke. We have been sourcing from Reliance, so we are fortunate. We have switched over 90% plus to pet coke. We have remained insulated from the supply shortage as far as coal is concerned and for that matter even the steep price increase, which has happened in coal, but yes, pet coke prices have marginally gone up and we hope to pass that on to the consumers to the coming year as well.

Q: We have a News Wire18 flash indicating that cement dealers have cut prices by Rs 5 per kg in Gujarat and Delhi. Sanjay, any idea, any view on that?

Ladiwala: The price cut was announced much earlier in the North, especially, in the Rajasthan and Delhi area. It’s not the dealers, actually I would like to correct that it’s the manufacturers who have cut the prices because there is a lot of capacity. We just came on-stream in March itself. So the effect of it was expected to be felt if not in April, definitely in May.

That is showing signs of pressure on the prices and there has been a very slight correction in the West, very slight only in Bombay and Gujarat but not in the rest of Maharashtra as yet because there is more material coming on-stream. We are definitely going to see pressure on prices. This was expected, nothing new about it. Only thing is instead of May it’s happening in April.

Q: Do you think it will be only in the West?

Ladiwala: No, it will be more in the North than in the West.

Q: You said that North in the future is going to see less of capacity and more of demand?

Ladiwala: That’s right because there are infrastructure projects which have been announced and if they come on-stream that is likely to be absorbed.