Rebound in cement prices: Is this sustainable?

Cement prices have rebounded by Rs 20-70 per bag in the north, west and central regions in the past one month. On the other hand, prices have fallen by Rs 10-30 per bag in the east and south.

Sanjay Ladiwala, chairman of Cement Stockists & Dealers Association of Bombay, says the increase in prices is sustainable at least in the peak period. Price correction will happen only during the monsoon period.

Meanwhile, K Ravi, MD of NCL Industries, says the Telangana government is doing quite a bit for housing, infra, etc., which will boost prices, though at the moment prices haven't inched up much. However, he adds that consumption has gone up. Infact, prices have fallen by about Rs 20 per bag in Telangana. He is still hopeful that things will improve in the next month.

Ravi is expecting more than 10 percent revenue growth on a year-on-year (YoY) basis in the January-March quarter.Below is the verbatim transcript of K Ravi and Sanjay Ladiwala’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Reema: We have seen an increase in cement prices in North and West as well as Central region and the increase is the tune of Rs 20 going up to Rs 70 per bag. Do you believe at least this increase in cement prices will sustain and is there scope to increase pricing further? Ladiwala: Yes to both the questions. The increase will be sustained at least in this peak period, which means till about May to about mid June. The increase is substantial in some regions. The growth in demand and the peak period both are supporting this and is likely to sustain. However, we will see some corrections only post monsoon or during the monsoon rather. Latha: The Telangana Budget was presented a few days ago. Were there any positives in terms of expected cement demand because of construction?Ravi: There are any number of proposals particularly for housing. The Telangana government is really doing something for the housing and other infrastructure particularly irrigation. I think all that is going to really boost the cement consumption here in the state. Latha: What is the situation at the moment in Telangana, have you seen any improvement in cement prices or for that matter in demand? Ravi: No, not really. The cement prices have not gone up but the consumption has gone up. From last three months, definitely month by month, there is a considerable improvement in consumption both in Telangana as well as Andhra Pradesh. Latha: Have the cement prices fallen and if yes by how much? Ravi: It has marginally, about Rs 20 fallen but this being March year ending for most of us, we all try to do lot of volumes; that is the reason but I am very sure the things are going to improve in the next month. Reema: If consumption has gone up, volumes are typically higher in Q4, what would be the revenue growth you could enjoy in this January to March quarter? Ravi: Revenue growth, maybe additional Rs 15-20 crore in our case. I think I will be selling at least 50,000 tonne more in this month. Reema: That would at least give you more than 10 percent revenue growth on a year-on-year (YoY) basis in Q4?Ravi: Correct. Latha: What about margins though, now you will have to pay a coal cess, the clean energy cess, so, how will your margins work out in FY17 if you can compare it to the FY16 margins?Ravi: As you mentioned rightly, one is the cess and the prices have also gone down so margins have come down. However, still the margins are okay, decent enough for company to survive. Latha: What will you do, 15 percent next year?Ravi: Maybe 10 percent certainly. Latha: I think this year the first nine months you managed a better margin than that. Last year you had done 16 percent.Ravi: Correct, but now the volumes are really going up and not much of new capacity is coming in. With that I am sure the prices also would go up in the next quarter. Latha: Will this be the trend that you will see? K Ravi is talking about volumes picking up, not so much prices, what is your estimate and if you can divide that regionally? Ladiwala: It is different for different regions. Each one has its own dynamics. What he is saying is definitely applicable to the South where the volumes are growing. The prices have stabilised at very remunerative levels so I don’t think there is much headroom for prices there.However, having said that, the spurt of growth in demand is likely to come mainly from the North where there are a lot of infrastructure projects coming up. So, North is a region where we will see the real growth coming in both in volumes and in prices. East as you know is very steady, both in volumes and prices, so there isn't much going forward there. The cause for slight concern is the West where the prices have sort of peaked and are stagnating at levels but the volumes have not picked up as much; many reasons of course drought and all those are the reasons, logistics, there are plentiful reasons why the demand has not picked up in the West. However, having said that, all the other regions are doing pretty well. Reema: The MMDR Amendment Bill coming through is it going to help M&A a) for the cement sector and some consolidation and should we expect any deals in FY17? Ladiwala: Absolutely, it is a great boost for consolidation in the cement industry and of course the industry is looking at the fine print and one needs to know the actual impact on the pricing at which consolidation takes place because of this bill. However, it definitely will give a boost to consolidation which will lead to stability in prices and therefore better profitability in the long run. So, I think it augurs well for the industry on the whole. Latha: Are you seeing a lot of M&A activity? Ravi: In South, not much of activity but as Sanjay rightly said, definitely that is going to take place, that is going to continue. In fact many more companies will be taken over by the big brothers. Latha: What is the industry dynamics now looking like in terms of margins? We saw some years of excess capacity and low utilisation, will the next 12 months be years of much better utilisation, what is the utilisation you are looking at and do you see therefore pricing power returning probably by end of 2016? Ladiwala: Absolutely. There will be definitely an incremental growth, growth which is exceeding the incremental capacity addition which itself will give pricing power to the industry. Also, the growth in infrastructure is likely to boost demand quite in excess of what we have seen for the current fiscal. So, both, the growth in demand as well as the M&A activity, cost of logistics coming down, all this is moving towards a much better outlook for the industry. Everybody is very hopeful that the infrastructure demand which has just recently kicked in, though late, will definitely get a much bigger boost post monsoon. So, for this fiscal, the next fiscal, FY17, everything looks pretty good both on margin, prices and volumes. (Interview transcribed by Priyanka Deshpande)