BOMBAY, 4 June — Cement stocks have been moving up and down like a yo-yo over the past few days and despite the volatility in these cement stocks, investors’ fancy for the sector remains intact. This week, let us take a quick look at the performance of the Indian cement industry.

Now that most of the companies have declared their financial performance for the year 2000-2001, it would naturally would be apt to first look at their performances. The aggregate net profits of 18 cement companies shot up by a whopping 293.3 percent to Rs. 522 crore in the quarter, despite single digit growth of 6.02 percent in sales income to Rs. 12,813 crore. While interest outgo increased by a small 3.63 percent to Rs. 268 crore, operating costs dipped two percent to Rs. 4,672 crore.

A 21 percent rise in other income to Rs. 195 crore and lower (1.13 percent) provision for depreciation to Rs. 251 crore boosted growth in the sector. Almost all cement companies, barring two, managed to increase their net profits or were able to make a turnaround into the black during the quarter.

ACC reported a net profit of Rs. 84.5 crore in the quarter, as against a net loss of Rs. 47.8 crore in the corresponding quarter of the previous year. Narmada Cement, Priyadarshini Cement and Prism Cement were the others that returned to profits after being in the red. Grasim, operating at over 100 percent capacity banked on the commissioning of a new plant and better penetration in the southern market.

These companies have not only raised prices, but have maintained a tight control on expenses leading to significant cost savings. Thus, their profit margins have risen sharply in spite of pressure on sales volume.

According to the Cement Manufacturers Association, despatches at 23.95 million tons in Q4 were actually lower than the 26.21 million tons in the same quarter of the previous year. Similarly, a voluntary cut in production impacted production levels which dropped to 23.87 million tons in the March 2001 quarter, down from 26.21 million during Q4 of 1999-2000.

However, industry analysts have an encouraging long-term outlook with demand growth of 7-8 percent over the next three years. On the price front, analysts do not see any significant downslide in prices due to the high manufacturing costs.

The industry has taken a conscious decision of improving realizations, even if it means reduced off-take. This strategy seems to have paid off, going by the results of the leading cement companies for the year 2000-01 in comparison to their performance in the previous year.

Cement majors are quite positive about the long-term prospects of the industry, as reflected by the capacity addition of 7.5 million tons in 2000-01, despite a lower capacity utilization of 82 percent in 2000-01 as against about 87 percent in 1999-2000. Even financial institutions agree with them, as they lifted the ban on funding, especially expansion plans, as the margins in the industry are looking up.

But this is expected to lead to a oversupply situation as many greenfield and expansion projects are coming up, this is over and above the 7.5 million tons already added in 2000-01.

But industry leaders feel that the growth in supply will be supported by a growth in demand. Various factors, including the plan to use concrete for at least 1500 km of national highways and the rebuilding of Gujarat, are likely increase demand for housing construction on account of the thrust and fiscal incentives offered by the government.

Even when there was a 2 percent reduction in demand for cement in 2000-01, the demand was up by 7 percent in Maharashtra, the largest cement-consuming region. Equally noteworthy is the 29 percent increase in demand in Orissa, following the rebuilding exercise, after the devastating storm that had hit it.

One has to also look at the cement prices which ultimately determines the bottomlines of the industry. The spurt in cement prices between November 2000 and January 2001 was sharp, unprecedented and facilitated by rationalizing supplies. The builders’ lobby complained against such practices before the MRTPC, which has issued notices to ACC Ltd, Gujarat Ambuja, Larsen & Toubro, Indian Cements and Grasim Cements. The proceedings are under progress.

Meanwhile, the builders’ decision to boycott Gujarat Ambuja and Grasim Industries met with failure. Thereafter, they had contracted to import cement Rs. 140-150 per bag, which lead to softening of cement prices, at least in the bulk/non-retail segment. The softening of cement prices is evidenced by the wholesale price index of cement which came down from 155.2 for the week ended Jan. 20, 2001 to 152.7 for the week ended April 7, 2001.

The process of consolidation virtually came to a grinding halt after the spurt in cement prices since November’ 2000. Now, even the weak players are able to hold their heads above water, and are demanding better price for a sell out.

But, of late, prices are weakening, particularly in the non-retail segment. While the hardening of prices from the current level seems unlikely, they will also not weaken drastically from the current levels.

Analysts say that a normal and well-distributed monsoon, perk up in the infrastructure projects can lead to a spurt in the demand. Consolidation of the industry through mergers and acquisitions may get accelerated after L&T finalizes the strategic partner for its cement division. So keep a watch on this sector and maybe you can stock up on these strong cement stocks in your portfolio.