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Tuesday, April 20, 2010

The four leading cement companies — ACC, Ambuja Cements, Grasim Industries and UltraTech Cement — are expected to report, on a combined basis, a .3% Y-o-Y growth in net sales in the March 2010 quarter, while net profit is also expected to rise by 17.3% Y-o-Y, according to ETIG estimates and reports by seven leading broking houses.

And the best performance, among these players in the fourth quarter of FY10, is expected to come from Grasim Industries — on a standalone basis —, thanks to a strong performance in its VSF business helped by a revival in the global textile trade, coupled with a pick-up in cement prices in northern and southern regions.

However, their performance in the fourth quarter of FY10 is expected to be a shade weaker than the December ’09 quarter, when the four players had grown their net sales, on a combined basis, by 7.4% Y-o-Y and a 21.7% Y-o-Y rise in their net profit. The relatively weaker performance in the March 2010 quarter vis-à-vis the earlier quarter for cement companies is attributed to a rise in key operational costs.

For instance, the cost of imported coal is estimated to have risen by nearly 25-28% in the fourth quarter, compared to levels at the end of the December ’09 quarter. In addition, there has been a rise in freight costs for cement companies due to the recent increase in diesel costs and an increase in excise duty on cement in the recent budget.

There’s no doubt that operational costs had been rising, but cement despatches for these four leading players had also risen nearly 5.3% Y-o-Y to 21 million tonne (mt) in the March ’10 quarter, helped by a revival in the real estate sector and government-funded projects. Meanwhile, for all-India player ACC, according to the broad consensus among broking houses, its realisations are expected to improve by about 2% Y-o-Y to Rs 3,710 per tonne in the March ’10. And given the cost pressures faced by the company, analysts are expecting a fall in its consolidated operating profit margins by nearly 265 basis points Y-o-Y to 28% on a Y-o-Y basis.

Similarly, UltraTech Cement is expected to see its operating profit margins shrink by nearly 290 basis points Y-o-Y in the fourth quarter of FY10 due to a rising cost structure. However, Ambuja Cements is expected to see a slight improvement in its operating profit margins on a Y-o-Y basis in the fourth quarter and that would be largely due to a reduction in clinker purchased from external sources, according to various estimates.

ACC, at Rs 919.15 per share, trades at 11 times on a trailing four-quarter basis and we are neutral, while Ambuja Cements trades at 14.7 times and is expensive. UltraTech Cement trades at 11.6 times and we are neutral on this stock, given the earlier restructuring plan announced for the Aditya Birla’s cement business.

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