Q3FY2009 Cement earnings preview: dated January 07, 2009

Q3FY2009 Cement earnings preview Driven by the strong revival in dispatches in the last two months, cement volumes are estimated to have grown by 8.3% year on year (yoy) to 44.1 million tonne (MMT) in Q3FY2009 as against 40.8MMT in Q3FY2008. However, capacity in the same period increased by 19% to 51.51MMT, resulting in a decrease in the utilisation ratio, which is expected to drop to 86.4% in Q3FY2009 from 94.6% in Q3FY2008.  Overall, Sharekhan's cement universe is expected to register an 8.6% volume growth in Q3FY2009. Shree Cement, UltraTech Cement Company (UltraTech) and Orient Paper & Industries (Orient) are likely to report an impressive volume growth of 27.4%, 11.4% and 13% respectively for Q3FY2009 due to capacity addition. Sharekhan's universe is likely to register a 6.9% growth in its top line and a 23.5% decline in its earnings on a y-o-y basis. Shree Cement, Madras Cement, UltraTech and Orient are expected to post impressive sales growth of 23%, 18.3%, 16.8% anLoading…d 13.8% respectively due to capacity addition carried out by them. In terms of realisation, south-based companies are fetching healthy realisation whereas companies operating in the other regions are struggling to sustain their realisation. However, during the period under review the gross realisation of cement across the nation declined on the back of the pass-through of the benefit of the excise duty cut. The recently announced excise duty cut from 12% to 8% has translated into a reduction of Rs10 per 50kg bag. In response to the government's announcement, all the cement companies have reduced cement prices by Rs4-6 per 50kg bag. This means companies are still enjoying a benefit of Rs5 per bag. So going forward, this benefit of Rs5 a bag can act as a buffer for the cement companies. The adjusted profit after tax (PAT) of the companies in Sharekhan's universe is expected to decline by 23.5% because of a significant fall in the operating profit margin (OPM). The OPM is expected to decline by about 257 basis points to 1,328 basis points. Moreover, a sharp increase in the interest and depreciation charges due to capacity expansion will have an adverse impact on the bottom line of the cement companies.