The Hindu Business Line : India Cements: Hold

SHAREHOLDERS of India Cements can remain invested, as there has been a big boost to the debt-reduction process. The fundamentals in the southern market also appear to rest on more solid ground than a year ago. These should enable the company scale up its earnings to respectable levels. If there are any sharp declines linked to the broad market at any time over the next few months, investors can use the opportunity to accumulate the stock.

Our view is based on the substantial expansion in the equity base that could cap the upside over the near term and offer attractive entry points at similar price levels at a later date.

India Cements has raised $110 million (about Rs 500 crore) by an offering of global depository shares in overseas markets. This is likely to lead to a significant reduction in its debt burden. The company has, over the past year, had the benefit of a restructured debt burden with lenders providing concessions in interest rates and also extending the repayment period; this coupled with the improved pricing environment has led to a turnaround.

This is, however, only a part of the story. Even now, the interest burden accounts for about 60 per cent of the operating profits. When the company cuts the debt over the next few months, there is likely to be a flow-through benefit to the bottomline due to the savings in interest cost. There has also been a noticeable improvement in volumes over the past couple of quarters and this trend is likely to continue.

The equity base will rise 35 per cent to Rs 190 crore due to the recent fund mobilisation exercise. Even with the expected improvement in fundamentals, earnings are likely to remain unattractive relative to the equity base. The stock is, however, likely to continue to trade at levels that are not supported by fundamentals, as there are expectations of restructuring and consolidation priced in into the valuation to an extent.

The recent exercise has made the company more attractive as a potential participant in any consolidation move in the cement industry. Its capacity of 8.8 million tonnes is also an attractive element at a time when there are less than a handful of players with capacities in excess of four million tonnes.

The equity mobilisation and the consolidation of promoter holdings have placed the management in a comfortable position to pick and choose the strategic path for the longer term. If there is intent to rope in a partner, that could be postponed to a date when a deal can be cut at attractive price. We believe that such a possibility cannot be ruled out, as it will provide the final push to debt reduction and restore earnings to healthy levels. Our recommendation does not, however, factor in gains linked to such a development. The principal risks to our recommendation are an unexpected decline in cement prices and the pressures that rising energy and transportation costs could impose on the earnings stream.

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