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S. Vaidya Nathan

SHAREHOLDERS of India Cements with a penchant for risk can remain invested in the stock as there is the possibility of gains linked to restructuring of ownership claims. Despite an improvement in operational parameters in FY 04, the earnings are still in the red.

The reduction in interest costs, thanks to a debt-restructuring package, has also not proved adequate to effect a turnaround.

The lower level of losses is attributed to a healthy rise in revenues and operating profit margin (which, however, compares unfavourably with those of frontline players in the industry), and the benefit of the debt-restructuring package.

In the January-March quarter, the company benefited from higher prices and volumes. The operating profit margins, however, were less than half of Madras Cements, which caters to the same markets.

Unless there is a doubling of the profitability level, even financial charges after the benefits of debt restructuring and depreciation would not be covered. A sustainable level of healthy earnings appears distant.

India Cements is yet to recover from the debt burden that it accumulated to bankroll its acquisitions. It has breathing space as repayment of loans has been back-ended to be due only after about five years.

Adverse demand-supply balance may work against it.

Unless there is progress in cutting down debt levels, the splash of red on the earnings card is set to continue. As it stays in the red, more funds would be required to bankroll the losses as well as the day-to-day operations.

The demand-supply dynamics in the southern markets of Kerala, Tamil Nadu and Andhra Pradesh also do not offer any comfort. Sluggish demand growth and rapid capacity creation over the past five years continue to plague the producers in this region. The high price levels of the past six months are partly attributed to producers operating their capacities at lower levels.

As utilisation rates improve, prices may come under stress unless there is a spurt in demand, which appears unlikely. The new capacity to be set up by Dalmia Cement and the enhanced interest that may be shown by Grasim and the Gujarat Ambuja-ACC combine in the southern markets, as part of their ongoing battle, are also likely to act as a pressure point on prices.

India Cements' ability to raise equity to cut down the debt burden is weak. Even a doubling of the equity base would dent the debt levels only moderately . Its cash flows over the next few years may also not be sizeable enough to meet higher level of debt repayment under the restructuring package approved by lenders. Growth plans would also have to be placed on the backburner as banks and other financial intermediaries may be hesitant to finance capacity expansion.

Roping in a strategic partner from the MNC ranks or such as Grasim is an option that would have to exercised sooner than later. Only a partner with the ability to source debt and equity at attractive prices would be in a position to nurture India Cements to the path of respectable earnings.

Progress on this score may lead to a re-rating of the company's stock, even as it grapples with the challenges of supply comfortably exceeding demand for at least the three-and-a-half years. In such a situation, the pay-offs may be worth the risks and the waiting period. The risk to our recommendation is a lack of urgency in roping in a partner of strength, which could undermine the price that the stock may fetch.

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