Indocement to Boost Operating Margin by Cutting Costs

Indocement to Boost Operating Margin by Cutting Costs

Wahyudi Soeriaatmadja Bloomberg Jakarta

PT Indocement Tunggal Prakarsa, Indonesia's second-biggest cement maker, plans to boost operating profit margin this year by raising prices and using gas and cheaper coal to cut costs.

Indocement, controlled by HeidelbergCement AG, Germany's largest cement maker, expects to widen operating profit margin to 19.1 percent of sales, Finance Director Christian Kartawijaya said. The company posted an operating profit of Rp 836.2 billion (US$88 million), or 18.1 percent of sales, last year. PT Semen Gresik, Indonesia's largest cement maker with about 44 percent of the market, had an operating profit margin of 15.8 percent last year.

"We have raised prices by 5 to 7 percent and plan to raise them further so it would be as much as 15 percent higher this year," Kartawijaya said in an interview in Jakarta on May 28. Indocement controls 31 percent of Indonesia's market.

Jakarta-based Indocement, which was set up in 1985, is trying to diversify its fuel sources to cut the cost of making the building material and powering its machinery after net income plunged 59 percent to Rp 116 billion last year on higher expenses and foreign-currency losses. Net income in 2003 was Rp 7.9 billion, excluding the year's gain from asset sales and other one-time gains.

"We can use gas, blend our coal" with cheaper varieties of coal, Kartawijaya said.

Indocement uses coal to heat kilns, besides using diesel and natural gas to power electricity generators used to run other machinery and equipment.

"It's high time that cement makers such as Indocement make adjustments in their equipment and use the cheaper, lower-grade coal," Jeffrey Mulyono, chairman of the Indonesian Coal Mining Association, said in a phone interview. "Theoretically, cement makers can use any kind of coal. Blending is the right move for more efficient cost."

Shares of Indocement, traded on the Jakarta Stock Exchange, have risen 1.6 percent this year, compared with the benchmark Jakarta Composite Index's 7 percent gain. The stock rose 25 rupiah, or 0.8 percent, to 3150 at 9:53 a.m. local time.

Cement sales in Indonesia are rising as faster economic growth and the lowest interest rates in six years raise consumer spending and boost the construction of homes and retail space in the nation of 238 million people.

Indocement may also capitalize on the country's plan to boost infrastructure spending. The government said in January it may need US$150 billion of investment in roads, power plants and other projects to create more jobs and accelerate the pace of economic growth during the next five years.

Indonesia's $222 billion economy, Southeast Asia's biggest, expanded 5.1 percent last year and is forecast by the government to grow 5.5 percent this year and 6.1 percent next year, the fastest since 1996.

"Indocement is to benefit the most as the toll-road projects that the government is launching now are mostly in West and Central Java," said Agung Wisnu Wardhana, who helps manage the equivalent of $400 million in Indonesian equities and bonds at Bank Indonesia's pension fund, including Indocement shares.

Indocement has plants in Citeureup and Cirebon in West Java and in South Kalimantan, with a capacity of 16.5 million tons.

Still, cement demand hasn't caught up with supply.

Indonesian cement makers sold 37.7 million tons in 2004, an 8 percent increase from a year earlier. That compares with the combined capacity of all Indonesian cement makers of 45 million tons a year, Satriyo, president of Semen Gresik, said on April 20.

"Indocement doesn't see any need for expansion for another four to five years," Kartawijaya said. This year, Indonesia's total cement sales may rise 10 percent. "We are going to at least maintain our market share this year."

As many as six analysts surveyed by Bloomberg in the past month rated Indocement stock a "buy," while one had a "sell" rating.

"With an operating rate of only 74 percent currently and located in a high-growth area, Indocement appears well-placed" to boost market share and improve profitability, JP Morgan analyst Ami Tantri said in a note to clients.