panch-tattva talk…cement scenario

Friends,

I have been pointing out to you that what media reports is mostly with an angle to serve and the gullible are taken for a ride. This time I am taking up to discuss the piece title ‘ACC:it could get worse’ under the column ‘COMPASS’and done by Shobhana Subramanian and Amriteshwar Mathur appearing in Business Standard today ie 14th May 2008.

It is going to a detailed disection and sentence by sentence. The first sentance goes like this ‘Cement stocks Ambuja Cements and Grasim were close to 52 -weeks lows on tuesday with govt. wanting to control prices.’ This gives an immpression that the scope for cement stock is worst and particuarly for ACC while the fact is that the ACC is at the moment at its three year low while the referred stwo stocks are way above their three year. Natuarally , ACC has hardly to loose value in future even if the realisation for cement goes further down.

The next sentence is ‘The industry , however, howevr grappling with rising costs of power and fuel : domestic coal prices , at Rs 1700 per tonne , have risen by nearly 15 per cent over past year.’ It is not clerified that the raw material costs in fact has not gone up for cement industry as the main raw material for them is lime stone and most cement companies have captive mines. Besides the ‘fly ash’ from coal power plants and slag from the steel plants have not gone up in prices but are mixed with clinker for cment production. Rates for power and fuel have gone up and so also the cement prices per bag. The OPM is therefore maintained for most companies making them turn in larger PAT.

 

The third sentence says : ‘That’s why India’s biggest cement manufacturer , the Rs 7067 cr ACC’s March 2008 numbers were tad below expectations.’. What a confusing way of saying things here. The perfromance for March 08 quarter was in fact the best in the ACC’s history in terms of gross sales and PAT. By saying that it was tad lower than the expectation , the focus has been tried to be misplaced.

 

The fourth sentence goes like : ‘While the numbers are not strictly comparable , ACC’s operating profit margin (OPM) slipped 410 basis points to 26.2% even as net sales rose just over 7 per cent to Rs 1796 crs.’ Here by the analysts own admission the fall in OPM is less than half per cent while the sales are up 7% to off set any impact. But it has been shown as weakness and the fall from high of 1300/- per share by more than 40% is tried to be justified and chances of further fall have been implied.

 

The first sentence in second para is : ‘In better times during CY 07, ACC’s consolidated operating profit margin expended 350 basis points to 27.3 per cent, as it kept tight check on operational costs like freight .’ It is clear that the sentence does not convey any meaningful substance. If ACC could keep check on costs in 2007 , ir has been able to do so in March 08 quarter in still more effocient way as the coal price jump of 15% could hardly damage the OPM or PAT.

 

The second sentence in secon para goes like this :’Rival Ultratech Cement’s OPM improved 260 basis points to 30.5 per cent in March 2008 quarter, helped by realisations that grew an impressive 16 per cent to Rs 3372 per tonne.’ Very right, but it only shows that the havens are not goint to fall for cement industry.

 

‘ACC’s cement despatches in Q CY 08 were higher by 7 per cent though net realisation at Rs 3300 per tonne levels were flat.’ : This was the third sentence in second para. The differnce of Rs 70/- per tonne in realisation for ACC is well justified for it is a company having plants all over the country and this average realisation is a matter of appreciation rather than of concern.

 

The fourth/fifth sentences in secon para conveys : ‘Going forward, the underlying concern is addition to cement capacity , as the industry is expected to add another 20 million tonnes in capacity over the next 12 months.In addition , the recent ban on cement and clincker exports could add another 4-5 million tonnes to supply.’ Here also see the bright side. The govt’s concerns will be over when additional supply comes in market and the users have plenty of cement . Further , the ban on exports will be lifted as it is not a permanest resolve of the govt. and the cement prices will see stability. The realisation on exported cement will be better as the rupee has had a a good fall .

 

The fourth para says that :’That might well result in a surplus of 10-11 million tonnes in the market, observe the industry watchers , predicting that the prices could come off by as much as 10 – 15 per cent. At Rs 683 , the stock ACC trades at 10.4 times estimated CY 08 earnings and should be under performer. Ultratech at Rs 666, trades at 12 times estimated FY 09 earnings and is expensive given the less than promising outlook for the sector.’ Here again a bad light is thrown on ACC while it has better discounting. The cement prices have had a good run up and hence the potential consumers must have been postponing consumption and that demend would come back if the prices ease only slightly. The glut situation in cement may not come for decades together. Can you ever expect to supply enough of cement to an economy growing by 8-10% per year. The infrastructure thrust ensures that any single bag of additional availability of cement will be a shot in arm.

 

 Cement is a commodity which does not have the threat of dumping by the foreign cement producers because of the high component of transportation costs in the consumer end prices. It is also a commodity which is suseptible to get damaged in certain weather conditions and if stored for long time.

 

ACC as also other cement companies have been able to rationalise their old plants and have put up new ones all out of earnings and have reduced their leveraging . The interest outgoes do not therefore damage their earnings as much as was the case earlier. If you consider the replacement costs of the present capacities of ACC , I think it will be enormous. In Harshad times a share of ACC sold for as much as Rs 10000/- (Rs 100 paid up). The reverse is happening today ie it is selling for less than half its intrinsic worth.

 

What is more of concern to me is the possibility of the deliberate misguidance and spreading of scare in respect of one of the most promising sector of economy. It may be that some quarters are pushing down the prices and there would be bulk deals between some smarties on one hand and the Indian institutional investors on the basis of average of past six month prices or some such basis worked out to give a feeling of fairness in deals. The insiders apart, there are people who can shoot even sharper without regulatory bodies having an inkling. I am pained to see such reporting in a business daily of repute. There is no doubt that there is a bias in the whole write up.

 

HariOm,

krsnaKhandelwal