The past week has seen several quarterly financial results from producers in the world's second-largest cement industry: India. So far, they do not make for a great read from an economic perspective, although some players, including Birla Group and Sanghi Cement are yet to show their hands.
So let's kick off. For the quarter that ended on 30 September 2015, LafargeHolcim subsidiary Ambuja Cements saw its net profit slide by 36% year-on-year to US$23.6m compared to the same period of 2014. Its income fell by 4% to US$324m as it battled a one-off charge. ACC, LafargeHolcim's other Indian subsidiary, saw a profit of US$17.5m for the quarter, a year-on-year fall of 40% compared to 2014. Not great for the global number one player.
Other players to announce so far have included JK Cements, which reported a 58% fall in consolidated net profit to US$2.1m. Meanwhile, Century Textiles, which owns Century Cement, fared even worse. It actually posted a loss compared to a marginal profit in 2014, despite an increase in total income.
It has not been all doom and gloom however. UltraTech Cement, while it reported a drop in profit, was not as badly affected as the firms listed above. It recorded a 3.9% fall to a net profit of US$59.7m for the quarter, down from US$62.3m in the same period of 2014. This was reported as being better than expected according to a senior research analyst at Angel Broking, perhaps hinting at shaky ground under even these results.
So far, the exception to the lower profits and losses has been India Cements Ltd (ICL), which posted an almost five-fold growth in its net profit. It profit grew from US$1.14m to US$6.26m, which it said stemmed mainly from improved operating parameters and substantial reductions in its variable costs. Its operating profit grew to US$35.4m from US$27.9m. It expects performance to improve as it increases its capacity utilisation rate up, currently languishing at just 60%.
Does the company provide a model for other producers to follow? Perhaps. The company's managing director and vice-chairman of ICL, N Srinivasan, said that the company was poised for improved conditions in its markets. In the company's results he said, "Going forward, we see better times ahead. We had a tough time for two years and have achieved a turnaround by cutting costs and maintaining a healthy cement price." The fact that ICL has managed to 'maintain a healthy cement price' in times of low requires scrutiny in a separate column.
However, a possible take-away from the results released so far is that the larger producers seem to have greater immunity to the problems surrounding over-supply in India. Economies-of-scale and the ability to spread risk around different Indian markets tends to favour larger players like UltraTech. Conversely, a smaller player that finds itself 'stuck' in one of the weaker regional markets, must just sit tight and weather the storm. Either that or it can make itself into a strategic acquisition target for one of the larger groups.
We are still awaiting results from other players in the Indian market, but with low demand, it would be foolish to expect them to be significantly different from the above. Given this, two key factors will help determine whether the decline in profits continues or not. Firstly, India's Modi government is promising large-scale infrastructure projects, which would help boost demand for cement. The industry has heard such promises in the past, however, and may chose to be skeptical. Secondly, it is important to remember that lower profits are being seen at the moment, even despite lower coal costs. Any upward change in these costs and the pace may become too fast for some of the country's smaller producers.