Expect cement demand, prices to rise in H2FY16: Star Ferro

Amidst sluggish cement demand in the north-eastern states, Star Ferro and Cement will continue to face margin pressure due to low capacity utilisation and fallen prices this quarter, says Sanjay Gupta, CEO of the company.However, cement prices are likely to increase by Rs 10 to Rs 15 per bag in Q3 with a pick up in demand in second half of FY16, Gupta tells CNBC-TV18.While the company's capacity utilisation was at 55 percent in Q2, he expects it to be at 90 percent in H2FY16.With a market share of 23.5 percent, Gupta expects Star Ferro's FY16 margins to be as it were in FY15.Below is the verbatim transcript of the interview..Nigel: Could you give us a couple of details first in terms of cement prices. When was the last price hike you took and on a month-on-month (MoM) basis could you tell us what has been the increase in the north as well as eastern region?A: We are primarily based out of north east. The prices in north east has in last quarter two they have actually come down by around Rs 10-15 a bag. The last price increase which we had seen in the month of May and after that the prices has been sluggish. There has been a downward trend in the prices. So, they have come down by Rs 10-15. In Bengal, Bihar and the eastern side of it and Jharkhand market we have seen the prices has come down by around Rs 20 a bag. But this normally happens as the monsoon season is there and once the monsoon season ends we definitely expect these prices to at least move up to the level what they were in the month of May.Reema: So you are expecting to recover this Rs 10-15 per bag cement prices and if yes, how soon?A: We expect that in quarter three the prices will definitely start moving up and maybe by end of quarter three or in the early part of quarter four we will see that whatever price correction which has happened because of the pickup in demand will also start from October itself. The rains have already subsided in the eastern side of it and even in north east the rains have already tapered off and we hope that up to the festive season the prices will definitely start moving up and we hope that by end of quarter three or early part of quarter four we will see that the prices moving up by Rs 10-15 a bag.Nigel: Can you tell us what about your capacity utilisation. I remember the last time we spoke you were telling us that in the monsoon season you did say the demand was growing only by around 2-3 percent. So, did you expect that to pick up now from the second half of the year and also what is your current capacity utilisation, is it at around 65-70 percent?A: Quarter two we have the capacity utilisation of around 55 percent because of the fact that we have taken our annual maintenance during this period. Normally most of the cement plant take annual maintenance during off season time. So, we have also done that. So, this quarter our capacity utilisation was 55 percent but the quarter one the capacity utilisation was around 75 percent.Going forward in quarter three and four we expect capacity utilisation will improve and for the year for FY16 we expect the capacity utilisation will be somewhere around 75 percent, that is what we are expecting and in terms of demand in north east yes, the demand has been sluggish. Overall if you see the entire cement market in India the demand has been sluggish but in eastern side there is some demand. North east it was around 3-4 percent in quarter two also but it hasn't grown more than that. But we expect that - that is always a normal trend in the north east. We have seen this happening in FY14-15 also and we see that quarter three and quarter four are normally much better than quarter one and two.So, we expect that the overall demand outlook which we have for the entire north east of around 8-9 percent we expect that we will have demand growth because we are looking forward to the road projects, railway projects which have already been allotted and some demand to start picking up from those region. The retail also should start picking up once the festive seasons are over.Reema: So, considering that your capacity utilisation was lower at 55 percent in this quarter prices too came down in the quarter that went by, would your margins be under pressure and if yes, what could be the extent of margin pressure in this period up to September?A: First half on a full year basis on FY14-15 we had margins of around 60 percent, EBITDA margins of around 30 percent and on per tonne basis it was around Rs 1,850 per tonne. We still maintain that on FY16 we will have similar kind of EBITDA margins but yes, in quarter two definitely the margins will be lower and that was also the trend in FY14-15, if you look at it the margins were around 20 percent last quarter. We expect that the margins should be around similar levels but on yearly basis we still maintain that we will be able to have similar EBITDA margins which we have quoted in 2014-15.Nigel: You are talking about capacity utilisations of around 75 percent. In the first half of the year you have done around 62 percent. So, you are expecting capacity utilisation to go to 90 percent?A: I expect that to happen - if you look at it in totality that has always been the trend. Quarter three and quarter four the demand normally picks up rapidly. So, we expect that to happen.Nigel: And EBITDA per tonne in the first quarter you did Rs 1,850. For the second half of the year how much could you guide and for the year on the whole for FY16 on the whole taking into account all the various pluses we get in coming in from the north eastern region?A: Quarter one the EBITDA margin was around Rs 1,890 and quarter two we will have our results soon. So, we will know about that but we expect that the margins will be definitely under pressure because of the lower demand and the prices which has come down but definitely we always feel that that has been a trend for quarter two and quarter three and quarter four we will always see definitely an improvement in demand. So, the overall FY16 we still maintain that we will be close to the margins which we had for FY15 of Rs 1,850 a tonne.Nigel: Can you give us what exactly is the market share now. How much of market share does Star Ferro and Cement have in the north eastern region. Compare it, give us numbers, how much does Dalmia have, how much do you all have and are you all seeing some of these small cement players coming in there and eating some of that market share?A: We aim a market share of around 23.5 percent as of now. We are maintaining our market share of around 23 percent. Dalmia will have around 15-16 percent of market share and the third player which is there is Meghalaya Cement and they will have around 12-13 percent market share. So, top three players are around 50-55 percent of market share. But there are a lot of smaller players in this region. In Guwahati there are lot of small grinding units. There are units which are producing around 2-6 lakh tonnes of cement also. So, definitely there is competition in that region but the prices have been unstable. The total capacity of north east is approximately around 10 million tonne and the top 3-4 players are having a capacity of around 6.5 million tonne. So, we still feel that whatever competition which is there now the capacity utilisation will definitely increase for the top three players.Nigel: There has been so much of talk about cement cartel. Confederation of Real Estate Developers Association of India (CREDAI) has been putting pressure on other cement users all over the country. Have you all heard anything from any of your consumers, real estate, the realty developers, the builders any of them, any kind of news that they are going to be complaining to the Competition Commission India (CCI) or not?A: We have not seen anything of that sort in north east or eastern side of it. There is a fair competition which is there. The prices has already gone down by around Rs 20 a bag and the cost pressures which are already there. The cement industry definitely is having a lot of cost pressures in terms of whether it is a Value Added Tax (VAT) rate increase by respective state governments. We are also seeing cost pressures coming in from the mining side of it where the royalty rates and the cess have been increased and we will also be seeing cost pressure coming on cement industry from the side of payment to district development funds and the limestone mining auction which will happen. So, definitely there are cost pressures and cement industry will definitely has to pass on that to the consumer. So, to that extent the price increase will be there. Beyond that we don't see anything of cartelisation or that sort happening in eastern side.