Sector Trends     19-May-11
Cement Products: Asbestos Cement Sheet producers regain pricing power partially
Asbestos Cement Sheet producers reported sharp fall in profits in FY 2010-11, on spike in costs, restrained pricing power amidst sluggish demand and intensified competition
Asbestos Cement Sheet (ACS) producers recorded three years of consistent rise in turnover and profits between FY 2007-08 and FY 2009-10. But the spike in costs and inability to pass on the same amidst sluggish demand and intensified competition meant that their profits fell substantially in the quarter and year ended March 2011. Players have attempted to increase ACS prices, and have been partially successful in the past few months. But still, for the foreseeable future, they donot expect the margins to go back to FY 2009-10 levels.

Players report fall in profits in the quarter ended March 2011

In the quarter ended March 2011, Everest Industries reported 5% fall in net profit to Rs 10.62 crore on 6% rise in net sales to Rs 197.43 crore. But the core building product segment of the company recorded 3% fall in revenues to Rs 145.68 crore, and steeper 33% fall in the PBIT (segment results) to Rs 17.50 crore, despite about 6% increase in capital employed to Rs 293.06 crore. But its steel building segment registered a turnaround with PBIT of Rs 4.56 crore in the quarter ended March 2011 as against loss of Rs 1.23 crore in the corresponding previous quarter, on 42% spike in segment revenues to Rs 52.14 crore during this period. This contained the damage, and the company restricted the fall in its overall profits to 5% at Rs 10.62 crore on 6.0% increase in net sales to Rs 197.43 crore, in the quarter ended March 2011.

Hyderabad Industries recorded steeper 60% fall in profits to Rs 10.52 crore on 7% fall in net sales to Rs 191.24 crore in the quarter ended March 2011. The company has set up two 1.80 MW wind turbines at Vandhiya in Gujarat, and one each was commissioned on 31.03.2011 and 18.04.2011 respectively.

Costs Escalate

Asbestos fibre, cement and fly ash are the key inputs for asbestos corrugated sheets. Cement prices have hardened at a faster pace than the improvement in the asbestos cement sheets. The All India average cement prices have surged from Rs 226 per 50 kg bag in September 2010 to Rs 262 by February 2011.

India imports almost the entire quantity of its requirement of chrysotile asbestos fibres. We have taken the operations of Ramco Industries, to identify the trend in cost of asbestos fibres. Based on the annual purchase cost of asbestos fibre cost, in the total annual sales of asbestos fibre sheets. This gives an approximate trend, which evidences that the share of asbestos fibre cost in the total sales value of asbestos fibre sheets have been increasing from about 29% in FY 2004-05 to about 43% in FY 2009-10.

There are efforts at the industry level to form a special purpose vehicle, which will acquire asbestos mines abroad. This should help secure the country's asbestos fibre requirement of future, and there will also be some cost saving, as the players will become a sizeable, but minority stake holder in the mines.

Players succeed in hiking prices, but margins to remain under pressure

We have found that the prices of both asbestos fibre has been hardening, while cement prices surged in the second half of FY 2010-11, both on a sequential and y-o-y basis. Amidst sluggish demand due to extended monsoons, players decided to absorb the increase in costs till December 2010. Though they attempted to increase the prices in January 2011 and February 2011, they had to bring down the prices steeper in March 2011, due to sluggishness in demand.

But as the cost escalation was higher, and as there was improvement in demand, especially in the rural housing side, the players finally resumed the hike in prices in April 2011. Based on Whole Sale Price Index of Asbestos Corrugated sheets, we find that the prices were over 8% higher in January and February 2011, but was about 2% lower in March 2011, on y-o-y basis. But thanks to increase in WPI from 123.3 in March 2011 to 128.8 in April 2011, the price levels are about 2.7% higher in April 2011, on y-o-y basis. However, considering the steeper rise in asbestos and cement prices, besides transport costs, we expect the industry's margins to remain under pressure, unless the players plan further hikes, and demand remains conducive for the same.

Expansions & acquisitions

Everest Industries is planning to set up 1 lakh tonne fibre cement product plant at Orissa at an outlay of Rs 50 crore. Ramco Industries has commissioned 1.2-lakh tonne fibre cement product unit at Industrial Area, Bihiya, Bhojpur District in Bihar in May 2011 at an outlay of Rs 35 crore. For this purpose, it has taken about 20 acres of land on lease for 90 years from Bihar Industrial Area Development Authority, Patna.

Visaka Industries has expanded its Pune unit by 30000 tonne to 1.2 lakh tonne. Similarly, it is also planning to set up 2.16 lakh tonne asbestos cement sheet unit at Orissa. The Orissa plant is likely to be commissioned in June 2011.

In September 2010, Hyderabad Industries took 45000 tonne fibre cement sheet manufacturing facility at Saidpura, Dora Bassi, Punjab on lease.

IPL fever takes Visaka into Srilanka

Visaka Industries has acquired 10% stake in Somerset Entertainment Ventures (SEV) for Rs 12.50 crore. SEV has got the rights to develop Sri Lankan Cricket Premier League in collaboration with Total Sports Asia. The league will play four-day, limited overs and T20 games. The league has most of the top Sri Lankan cricketers from the national side, representing various provinces. The tournament was earlier known as the Inter-Provincial Tournament, will now be renamed the ‘Sri Lanka Premier League' (SLPL). This is the Sri Lankan version of India's IPL.

The valuations of IPL franchisees have surged in the recent times. SEV is the exclusive partner on a long term basis to develop and market the rights for SLPL. While SLPL may not generate the kind of money IPL is generating, Visaka Industries is hopeful that, down the lane, it will be making substantial gains when it decides to sell its stake in SEV.

Ramco Industries has huge investments in group companies

Ramco Industries has 4,93,12,420 shares, while its subsidiary Sudarsanam Investments has 29,82,600 shares in Madras Cements as of 31st March 2011. Based on share price of Rs 88.45 on 18th May 2011, the value of above investments in Madras Cements is Rs 462.55 crore. Besides this, Ramco Industries has stake in other group companies, and some investments in HDFC, HDFC Bank, Indian Bank and Vijaya Bank. The value of its investment, excluding investment in Madras Cements, is Rs 69.85 crore. In all, the company has investments worth Rs 506.02 crore on stand alone basis, and Rs 532.40 crore worth of investments in listed entities, including investments by its subsidiary.

Besides, the company also has a subsidiary called Sri Ramco Lanka Private Limited, which is also into asbestos cement sheet business in Sri Lanka. Ramco Industries gets royalty and dividend from the Srilankan subsidiary. Besides, it has floated another subsidiary in Srilanka, which will commission a new asbestos cement sheet capacity in Srilanka in the current fiscal.

Production

The organized asbestos cement sheet sector recorded over 7% increase in capacity to about 44 lakh tonne by March 2011 from estimated 41 lakh tonne in March 2010. This is in addition to about 5 lakh tonne of capacity with the unorganized sector. While the industry is facing through squeeze in margins, it is confident of strong growth in demand in future.

The demand for asbestos cement sheets (ACS) primarily comes from rural housing, which constitutes about 70% of the total demand. About 13% of the demand comes from Industry, 7% from Government while poultry and other segments constitute the rest 10% of the domestic demand for ACS.

Thatched roof is not waterproof and poses a fire hazard besides needing regular replacement. Tiled roof needs continued maintenance and is not safe. Therefore, whenever the economic conditions improve, the first choice of the rural poor is to replace the roof over their head with affordable, waterproof, heat insulating and long lasting fibre cement roof sheets.

To provide adequate shelter to the rural poor, the government of India has introduced programmes like Indira Awas Yojna (63% higher allocation in FY 2011 compared with FY 2010), the Golden Jubilee Rural Housing Finance Scheme, the Pradhan Mantri Adarsh Gram Yojana, the Productive Housing in Rural Area and the Rural Housing Fund which is a positive for the roofing sector.

Also, the rural sector benefited from increased production and higher agri commodity prices, leading to healthy growth in rural income in FY 2010-11. The Indian Metrological Department expects normal South West Monsoons 2011, which coupled with increase in area under crop, improvement in productivity and elevated agri commodity prices together should lead to buoyancy in rural income to continue this fiscal too. This augurs well for the Indian ACS sector.

The extended monsoons in 2010 had impacted the demand for ACS. Simultaneously, cost pressure intensified both at the asbestos fibre and cement level. But the industry could not pass on the rise in costs due to sluggishness in demand, which showed signs of improvement in the past few months. So, the industry has started passing on the rise in costs through hike in ACS prices. Still, we find that the full rise in costs were not passed on, and as a result, the industry continues to suffer from fall in margins on y-o-y basis.

Outlook

The improvement in the rural income augurs well for the ACS industry. Cement prices remain elevated, but can show signs of weakness in the ensuing South West Monsoons 2011 due to estimated sequential fall in demand, and accelerated capacity addition lead fall in capacity utilization. So, there could be some savings on input cost front from the second quarter of the current fiscal. But during this period, the demand for ACS also eases, as farmers will be busy in agricultural activity rather than changing the roof of their houses. But still, the players are hopeful of better demand growth, and improvement in profitability in the current fiscal, though the return of margins to FY 2009-10 levels may not happen any time sooner.

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