The stocks of the two leading cement players, Holcim-controlled ACC and Ambuja Cements, have sharply under-performed the broader market over the past three months. This is due to investors being increasingly nervous on the outlook for this sector, given a rapidly-rising cost structure. Further, with the onset of monsoon, demand from key user industries typically eases.

At Monday’s close of 954.5, the ACC stock declined nearly 14.5% during the past three months compared to a 4.5% fall in the Sensex. Similarly, Ambuja Cements has fallen 12.6% during this period.

Cement producers have seen their production costs increase significantly. The two key input costs for the cement industry, namely power and fuel, coupled with freight charges have seen an upward trend, on a per-tonne basis. In the case of power and fuel costs, cement companies have been grappling with a near 30% rise in coal prices for Coal India supplies, since end February, say analysts. Also, imported coal prices are up nearly 20% YoY in the quarter under review.

In the case of freight charges, earlier hikes in retail fuel prices are expected to push up cost overheads in the first quarter of FY12. The rise in input costs is expected to lead to a fall in operating margins of cement companies on a YoY basis in the June 2011 quarter, despite an estimated rise of 3-3.5% in cement realisations on a per-tonne, all-India-basis in the quarter.

These input costs, as a percentage of ACC’s consolidated net sales in the 11 March quarter, had risen 250 basis points YoY to 31.9%, hitting the the company’s operating margins. For the June 2011 quarter, ETIG estimates that ACC is expected to report an 12.5% YoY fall in net profit, despite a 17% rise in net sales, given cost pressures. In the case of Ambuja Cements. it is expected to report a 13.9% YoY decline in its net profit in the quarter under review. In the June 2011 quarter, ACC dispatches grew 11.8% YoY to 5.96Mt, helped by its recently expanded facilities at Wadi, Karnataka and Chanda, Maharashtra. Ambuja Cements’ dispatches, however, fell 3.3% YoY. ACC trades at a consolidated P/E of 17.3 times on a trailing four-quarter basis, and is rather expensive. Similarly, Ambuja Cement trades at 16.4 times and the upside in the short term appears limited.