The cement sector did well in 2011, which is why analysts are expecting a similar performance in 2012. In the past six months, the demand for cement has increased despite hitting a low in April-June last year. 

 

The slow pace of the latest capacity addition should help reduce overcapacity, thereby improving capacity utilisation. This means that the up cycle is gaining strength and may go on for a few more years. The 'pricing discipline' among manufacturers has also helped. Barring seasonal effects, cement prices remained stable, and helped fetch better realisations.

 

There is a greater pricing resilience among the south India-based cement manufacturers. While the average cement price in India fell by Rs 13 per 50-kg bag in December, compared with that in November, it was relatively stable in South India, except in Hyderabad. 

Once the ongoing harvesting season ends, the rural demand for cement is expected to rise. Moreover, Madras Cements is operating in strong pockets (Tamil Nadu and Kerala contribute 50 per cent and 23 per cent respectively). Though the demand in Karnataka and Andhra Pradesh, which contribute 10% each to its sales, is slightly low, Madras Cements could mitigate it by focusing on Tamil Nadu.

The company is focusing on maximising profits and, hence, doesn't have any major capacity expansion plans, except the ones in the pipeline. Madras Cements' capacity expansion work at Ariyalur and Selam is expected to finish in this financial year. The proposed 45 MW power plants are also expected to be commissioned in the first quarter of 2012-13. This should help reduce the dependence on costly external power. It will use the cash flow generated in the next few years to reduce its debt burden of Rs 2,800 crore, and pare the interest cost in future.

Though the long-term prospects are bright, investors should not lose focus on the short term. According to the consensus estimate, Madras Cements is expected to report low-key numbers in the third quarter. While a modest growth is expected in its overall revenue, there may be a fall in the net profit because of the hike in the cost of raw material, energy and interest. So investors should use volatility triggered by this to invest in it. With the recent low landed cost of coal and pet-coke, the energy cost should moderate in the coming quarters. 

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