Stock Review: HEIDELBERG CEMENT

HEIDELBERGCEMENT India's results for the September 2010 quarter again highlight the difficult operating conditions for players in the sector, given the rising cost structure and weak realisations on a pertonne basis. In addition, the near-record monsoon rains this year curtailed demand for cement during the quarter under review.

   As a result, the company's operating profit margin declined by nearly two-third compared to a year ago to just 6.9%, while net sales fell 19.1% to 174.9 crore. The stock declined by nearly 5% in the past two trading sessions.

   The company witnessed 13.4% year-on-year decline in its realisations to 3,238 per tonne in the quarter. Its cement dispatches also fell marginally to 5.4 lakh tonnes in the September 2010 quarter.

   The company has presence in the southern, central and western regions. Weak realisations reduced its net profit to just 2.8 crore, 1/10th of the profit a year ago. The company follows the calendar year for its accounts.

   Heidelberg Cement had suffered from lower realisations even in the June 2010 quarter. Media reports highlight that cement prices over the past few weeks have been raised across several parts of the country. Typically, construction activity picks up post monsoon and that should give a boost to the demand for cement.

   However, it is still not clear if higher cement prices can be sustained, especially in the southern region. Cement capacity over the past few quarters has shown an upward trend in the region, at a time when demand has remained sluggish. Nevertheless, higher realisations should help the operating margins of players like HeidelbergCement going forward.

   Rising fuel cost is another concern for Heidelberg. It jumped by over 14% year-on-year in the September 2010 quarter. Coal prices are broadly higher given strong demand conditions especially from the emerging market economies. Concerns about the rising cost structure for cement companies are expected to remain for some time, say analysts.

   The stock of Heidelberg Cement trades at nearly 10 times its trailing four-quarter earnings and suitably factors in any potential upside in the company's earnings going forward.