The Hindu Business Line : India Cements: Hold

The company’s major presence in the export market could shield it to some extent against the likely surplus situation in cement that is expected to emerge in 2008-09.

The South has exhibited strong demand for cement.

C. Rajalakshmi

Shareholders of India Cements can hold on to their investments. At the current market price (Rs 201), the stock trades at about eight times its expected current year earnings. This valuation is at a discount to other leading cement manufacturers in this region, such as Madras Cement and Ultra Tech Cement. However, the earnings prospects may be moderate in the near term, given that the company’s expanded facilities in the North, which can contribute to volume growth, may take a few years to come on stream.

India Cements is charting plans to become a pan India player with facilities in Rajasthan, Himachal Pradesh and Madhya Pradesh to cater to the key markets in north India. It plans to double its total capacity from the current nine million tonnes to 18 million tonnes by 2009-10. The southern market has displayed stronger demand trends and firm prices when compared to the North in recent times. However, the expansion into the northern region may help the company diversify its exposure across regions. Incidentally, the southern market has recently seen policy intervention on cement price hikes. The company’s major presence in the export market could also shield it to some extent against the likely surplus situation in cement that is expected to emerge in 2008-09.

Backdrop

India Cements is a major cement player in the South. The company has seven cement plants distributed over Tamil Nadu and Andhra Pradesh with a total capacity of nine million tonnes. The company sells its products under the brands — Sankar Super Power, Coromandel Super Power and Raasi Super Power — with a market share of 28 per cent. In the past, the company has added to its capacities mainly through acquisitions — starting from Coromandel Cement in 1990, Visaka Cement in 1996 and Raasi Cement in 1998. Accumulated debt contracted for these acquisitions had led to the company reporting losses for three consecutive years between 2002 and 2004.

But, then, the company underwent a massive debt-restructuring programme and has effected a turnaround, having returned to profitability since 2004-05. The debt-equity ratio has over the years improved from 3.4:1 in 2002-03 to 1.5:1 in 2006-07.

Financials

From a mere Rs 4.58 crore of profit after tax in March 2005, India Cement’s PAT shot up to Rs 478.8 crores in the year ended March 2007, helped by a resurgence in cement demand and improving realisations on the back of strong price trends for cement. The company’s realisations per bag also improved from Rs 114 in 2004-05 to Rs 155 in 2006-07. The nine months ending December 2007 saw the company recording a 46 per cent growth in sales and a 99 per cent growth in net profit. In the last quarter, the company posted a 56 per cent increase in net sales and a 500 basis point expansion in operating margin compared to the corresponding quarter last year.

The company has lined up an ambitious plan of doubling the current capacity of nine million tonnes to 18 million tonnes by 2009-10. The estimated capital outlay for the expansion is Rs 1,450 crore.

A part of the funds for this was raised in December 2007 through equity placements to the institutions to the extent of Rs 592 crore. The equity capital of the company increased from Rs 260 crore earlier to Rs 281 crore after the QIB placement. Though the additional equity could weigh on earnings in the intervening period, as the current projects are expected to go onstream only by 2009-10. Part of capital expenditure is also being incurred towards the purchase of two large cargo ships for captive coal transportation and work is also in progress for setting up captive power plants of 40-50 MW capacity. These could translate into savings in input and logistics costs which have weighed on recent earnings performance.

The southern markets have witnessed strong demand, tight supply and firm price trends over most of 2007 and the demand outlook for FY-09 also looks promising with government infrastructure projects on track in Tamil Nadu and Andhra Pradesh. In the period between FY09 and FY-10, demand in the region is expected to grow by 13 per cent.

However, though a tight demand-supply situation currently persists in this region, with fresh capacity coming into the market, supply might surpass demand towards the end of this year. In the North, Haryana and Rajasthan are likely to outpace the regional demand growth with large ongoing hydropower projects.

The cement sector has not received any major benefits from either the Railway Budget or the Union budget. The hike in excise duty on bulk cement may have a minimal impact as bulk cement accounts for a relatively small proportion of overall volumes sold.

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