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India Cements: Reality check, a big surprise

S. Vaidya Nathan

IF one had looked at the lucrative prices of cement in the southern markets, the performance of India Cements for fiscal 2000-01 may seem to be a big surprise. In a year when for most months prices ruled in the Rs 165 to Rs 200 level in Tamil Nadu and Ke rala and at around Rs 130-150 in Andhra Pradesh, the company has reported a modest rise of 5.2 per cent in sales. Profit has increased at a slightly faster pace of 6.2 per cent.

These three States are the prime markets for India Cements. The peak prices in Tamil Nadu were at least 25 per cent higher than in the preceding year. In Andhra Pradesh too, the trend was similar.

Company data shows that production volumes are down by 12 per cent to 5.29 million tonnes, while sales volumes are down by around 10 per cent to 5.32 million tonnes. This has pulled down the revenue and earnings growth rate despite realisations improving by 13 per cent to Rs 2,695 per tonne.

However, there is the possibility that the numbers may hide more than what they reveal. The modest performance turned in by most cement majors in fiscal 2001-02 seem to conform to a pattern. Most cement majors have ensured that they report modest growth rates in earnings as well as revenues.

In a year in which cement manufacturers have been in a tight embrace to ensure high price levels, the modest growth rates reported also seems to fall into this pattern.

Nonetheless, the high price levels and some cost savings have ensured a two percentage point rise in operating profit margins to 25.05 per cent (23.29 per cent).

The debt-laden balance sheet continues to cast a shadow on profitability. A close to 12 per cent rise in interest charges at Rs 190.2 crore (Rs 170.4 crore) should be seen in the backdrop of falling interest rates.

With depreciation charges also showing a rise of 12.5 per cent, the post-tax earnings have barely budged -- moving up from Rs 45.31 crore to 48.15 crore.

Going forward, the decline in prices in Tamil Nadu -- where the change in political equations has also been a factor at least for now as cement prices were a subject of political controversy -- and sluggish volumes may mean stress on the profitability in the first half of 2001-02.

Even if producers get together again and push prices to higher levels, the cement prices are unlikely to be more than in the upper band of Rs 190-200 in Tamil Nadu and Rs 130-150 in Andhra Pradesh. Hence, unless volumes show a marked pick-up, the year ah ead may seem to point to flat trends in revenues and earnings.

The debt burden for India Cements shows no signs of easing and may again cast a shadow on profitability. The dividend payout of 18 per cent on equity as well as 11.5 per cent on preference capital may eat up more than half of the reported profits.

The small level of residual operating cash flows at around Rs 110 crore may also limit the company's ability to pare down debt in a significant manner. The share trades at a price earnings multiple of 9 times its 2000-01 earnings per share of Rs 3.48. Wi th the prospects not looking bright, existing shareholders could contemplate cutting exposures in the stock.