Why is the stock of India Cements rallying?

The stock of India Cements rallied by about 6.5 per cent intra-day on Wednesday, on reports of a possible takeover by Radhakishan Damani, the owner of Avenue Supermarts.

While India cements has denied any such moves, the Damani family’s increasing affinity for the South-based cement manufacturer is obvious from the rise in the latter’s shareholding in India Cements.

Based on the shareholding data available on the BSE, both the Damani brothers, Radhakishan and Gopikishan, together held a 19.89 per cent stake in India Cements as on March 31, 2020. This is a notable increase from the 4.73 per cent held in the quarter ended December 2019.

In recent times, most cement stocks have been battered in anticipation of weak demand stemming from the lockdown. However, India Cements managed to rally by a whopping 55 per cent from last week of March 2020, to a one-year high of ₹140 in end-May 2020. While part of the rally could have been due to an increase in the Damani family’s stake, the gradual improvement in cement pricing in the southern regions may have also been a contributing factor.

On the back foot

India cements witnessed a 17 per cent (CAGR) decline in its EBITDA per tonne over FY16 to FY19 to ₹513. In the December 2019 quarter, it reported a net loss of ₹5.37 crore. The company, with an installed capacity of more than 15 mtpa (million tonnes per annum), caters mostly to the cement demand in the southern part of the country. The southern markets have been witnessing pricing pressure since early part of FY19.

Due to the deteriorating metrics, the stock of India Cements touched a low of about ₹70 in mid 2019 from a peak of ₹200 in July 2017.

While the realisations in the South were already weak due to excess capacity in the region, stalled projects in Andhra Pradesh, deferred infrastructural spends from the southern States and an extended monsoon made matters worse in the first nine months of FY20, for companies with exposure to that geography.

However, owing to cost savings on account of lower power consumption and reduced logistics expenses, India Cements managed to see a recovery in EBITDA per tonne to ₹618 in the first nine months of FY20 (from FY19 levels).

Yet the EBITDA per tonne is still way lower when compared to its peers. Companies that have exposure to the southern markets reported an EBITDA per tonne of ₹711- 980 in the first nine months of FY20.

India Cements saw a spike in its working capital requirements, from ₹300 crore in the September 2019 quarter to ₹573 crore in the December 2019 quarter. In the earnings call for the quarter ended December 2019, the management also highlighted that their capacity expansion plans have been put on hold for now following the liquidity crunch.

Outlook

While the company is yet to announce its March 2020 quarter results, numbers are expected to be subdued. This is because, even large cement players have reported 10-16 per cent (YoY) drop in volumes. A recent report of Crisil, based on a survey of cement dealers, reveals a likely 30 per cent drop in cement sale volumes in FY21. This is because the ongoing challenges for the construction activity in the country amid the Covid-19 crisis will impact the demand for cement companies in the near term.

However, cement prices have not witnessed any tremors in April and May 2020 despite expected weakness in demand. Channel check reports of leading brokerages indicate that pan India prices (average) for a 50 kg bag have inched up by ₹10-40 in May 2020 (over April 2020) to ₹370, following pent-up demand and pre-monsoon buying in rural regions. On a YoY basis, prices have gone up by 3.3 per cent in May.

The maximum hike in prices was in the southern region, where the cement price per bag now hovers around ₹418 — up 13 per cent YoY in May 2020.

If this trend sustains, this could be a key positive for India Cements in the coming quarters. But the fact that the demand from the rural/semi-urban regions drove trade (retail) sales in May, implies that this spike may not sustain. Non-trade sales suffered in the first two months of this fiscal owing to the labour and capital shortages faced by many infrastructure players. This situation is likely to continue in the near to medium term, considering the disruption in economic activity caused by the Covid-19 outbreak. This may cap realisations for the companies.

Cost savings though could do its bit. With a 13 per cent drop in imported coal prices and 25 per cent decline in pet coke prices in the first quarter of FY21 so far, cement manufacturers including India cements can witness improvements in the EBITDA per tonne.

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