The Hindu Business Line : India Cements: Hold

SHAREHOLDERS can retain their holdings in the India Cements stock, as there could be room for gains linked to improving fundamentals and the likelihood of debt reduction.

Robust growth in volumes, higher cement prices and a check on costs enabled the company present an earnings card with a coat of black for the first quarter of FY-06.

Our view on India Cements is tempered by the dynamics of the southern market as also by the high interest burden that still casts a shadow on the company's earnings card.

The demand side of the story has shown a steady improvement over the past nine months; we expect this trend to continue.

There is likely to be a boost to supply as Dalmia Cements' new facility goes on stream. The gap to be bridged would only widen and a balance may emerge only over a two-to-three year period.

The company plans to raise about $115 million (approx Rs 500 crore) by issuing equity in the global markets. It has a better story now for would-be investors in the global depository receipt than at any time over the past five years.

This exercise would entail an expansion of 40 per cent in the equity, which is now at about Rs 140 crore.

Even if industry conditions remain favourable, it may take a few years for India Cements to generate earnings that could support such an equity base. And even after the GDR, India Cements' would have a sizeable debt burden.

In this backdrop, we retain our view that India Cements could be a candidate in the consolidation process that has been evident in the cement industry; it may also rope in a strategic partner.

The improving earnings picture in the company and the buoyant trends in cement sector stocks could provide an impetus to this process.

With a capacity of about nine million tonnes, the company is one of the few that could place a would-be partner in a position of significance in the industry.

Such an exercise could enable the company cut debt and push ahead with growth plans.

On an enterprise value basis, the India Cements stock trades at a substantial premium to peers, barring Gujarat Ambuja Cements.

This trend is likely to continue and the valuation may remain divorced from earnings in anticipation of structural changes.

We have buy recommendations on the stock at prices between Rs 13 and Rs 47 over the past couple of years and had switched to a hold earlier this year.

We would take a more positive view if there were brisk progress in the equity mobilisation plans.

sRising energy and transportation costs and a protracted delay in replacement of debt by equity are the principal risks to our recommendation.

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