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Cement industry seen hit by poor rains

Rosemary Arackaparambil in Mumbai

India's cement industry, the world's biggest after China, is likely to see earnings fall this year as patchy rains squeeze economic growth.

Analysts say cement prices, already down despite a pick-up in sales recently, could stay depressed as demand growth was likely to be slower than the eight to 10 per cent projected by the industry for this year.

"Poor rainfall will have a two-pronged impact," Urmik Chhaya, cement analyst with Karvy Stock Broking, said on Wednesday.

"Rural demand will get deferred as farmers would rather save than spend on non-essentials in times of uncertainty. Secondly, government demand will decline because public funds will get diverted to relief expenditure," he added.

Last week India declared a drought, the worst in more than 15 years, due to scanty rains in the first two months of the season.

The June-September southwest monsoon contributes 80 per cent of the annual rainfall, making it crucial for the farm sector which accounts for 25 per cent of gross domestic product and employs about 70 per cent of India's billion plus people.

Analysts say a revival in the rains during the past week will not be able to offset the damage already caused to farm output and spending, especially rural housing which accounts for about 40 per cent of annual cement demand.

"Although it is too early to make a call on the exact impact on companies, a drought is likely to have some impact on cement demand in the year of a weak monsoon," a J P Morgan report said last week.

These concerns have dragged cement shares down by eight to 19 per cent over the past six weeks, compared to a 10 percent fall in the Bombay benchmark index.

Independent think-tank Centre for Monitoring Indian Economy lowered on Tuesday its GDP forecast for India to 3.1 per cent for the year ending in March 2003, from an earlier estimate of 4.5 per cent, citing the poor monsoon.

EARNINGS DOWNGRADE

Morgan Stanley last week lowered its outlook on the cement industry to "in-line" from "attractive" citing the weak monsoon and cut earnings estimates sharply for the top producers.

It slashed profit forecast for No 1 cement maker Associated Cement Companies by 63 per cent from its earlier estimate to Rs 562 million for the current year ending in March.

The brokerage also cut its earnings projections by 38 per cent for the third-largest cement maker Grasim Industries to Rs 3.07 billion and by 23 per cent for No. 4 maker Gujarat Ambuja Cements to Rs 1.81 billion.

Most cement companies showed big drops in April-June net profit as price realisations fell 13-20 per cent from a year ago.

Cement prices have been under pressure due to supply overhang and competition from the large numbers of producers. Last year a production cut by key firms helped prop up prices.

"Whatever the volume, prices determine the earnings of cement firms," said an analyst with a local brokerage who felt average cement prices this year will end lower than last year.

Few analysts expect a similar cut back on output this year, but some believe the concerns on demand may be overdone.

"If rural incomes are affected by the drought they could put off investment in housing," said UTI Securities' Novonil Guha.

"But on the other hand as prices are very low, people may be encouraged to go ahead with building before prices rise again."

A K Jain, a director of ACC, added: "We looked at all the past data in years when rainfall has been deficient and we don't see any trend of impact."

An official at Gujarat Ambuja, which holds a 14 per cent plus stake in ACC, said October-May was usually the peak season for cement consumption when prices firm following the demand pattern.

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