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India Cements: No surprises… - Views on News from Equitymaster
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India Cements: No surprises…
Jan 16, 2008

Performance summary
  • Firm realisations and volume growth lead to 56% YoY growth in topline.

  • EBITDA margins expand 5% owing to cost control measures and robust topline growth.

  • Net profits grow 59% YoY.

  • Despite strong growth at operating level, net margins expand 0.3% YoY, due mainly to higher depreciation charges and tax outgo.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 4,724 7,379 56.2% 14,740 22,003 49.3%
Expenditure 3,394 4,930 45.3% 10,028 13,837 38.0%
Operating profit (EBITDA) 1,331 2,449 84.0% 4,712 8,165 73.3%
EBITDA margin (%) 28.2% 33.2%   32.0% 37.1%  
Other income 17 30 76.6% 80 186 132.5%
Interest 347 273 -21.3% 1,100 870 -20.9%
Depreciation 198 311 57.0% 583 889 52.5%
Profit before tax/(loss) 803 1,895 136.0% 3,109 6,592 112.0%
Tax 5 624 12386.0% 12 1,261  
Net profit 798 1271 59.3% 3097 5331 72.1%
Net margin (%) 16.9% 17.2%   21.0% 24.2%  
No of shares (m)         281.9  
Diluted EPS (Rs)*         27.7  
P/E (times)         9.4  
*trailing twelve month earnings

With effect from 1st July 2006, erstwhile Visaka Cement Industry has been merged with the company through a scheme of amalgamation. Accordingly, the figures for the quarter-ended December 2007 are not strictly comparable with the corresponding quarter last year.

What has driven performance in 3QFY08?
  • Led by strong demand growth and better realisations, the company has achieved 56% YoY growth in topline, during 3QFY08. The company is operating at optimum utilisation level (103% in 3QFY08), which leaves hardly any scope to increase volumes. It reported almost 6% YoY growth in volumes during the quarter. However, further enhancement in volumes would be witnessed as planned capacity becomes operational.

  • For the 9mFY08 period, topline reported 49% YoY growth owing to the same reasons, improved realisations (have increased by over 25% YoY) coupled with volume growth. Here one must note that, the current growth is led more by realisations than volumes. The company has outlined plans to expand capacity to increase volumes, however, its an industry wide scenario and once the capacities come onstream, the all time high realisations will get pressurised impacting margins.

    (% of sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Consumption of raw material 12.7% 9.0% 10.3% 9.2%
    Staff cost 5.1% 6.9% 4.8% 6.2%
    Power and fuel 25.2% 23.8% 24.9% 22.4%
    Other expenditure 12.6% 10.9% 12.2% 10.3%
    Transportation and handling 16.3% 16.1% 15.8% 14.8%

  • As mentioned above, though costs continued to scale up, the company has clocked 84% YoY growth in operating profits in 3QFY08 and 73% YoY growth in 9mFY08 owing to firm prices.

  • The company is reworking various ways to contain rising costs, such as setting captive power plants, utilising low cost gas based power, etc. However, rising coal prices, a key input, is exerting pressure on margins. Further, the company’s employee cost has scaled up in this quarter owing to one-time costs to the tune of Rs 200 m (employee stock option and bonus).

  • Rise in coal prices can be mitigated to a certain extent by reducing consumption of units. Coal is a key input and the country is facing supply shortage problems. Further, landed cost of coal is heading northwards. Thus, in the future too, the coal linkage or availability of coal will remain a concern.

  • The net margins have expanded marginally (0.3%) as compared to expansion in EBITDA margins (5%) owing to higher depreciation charges and tax outgo. The tax outgo has increased mainly on account of increase in revenues and deferred tax.

What to expect?
At the current price of Rs 261, the stock is trading at an expensive valuation of over US$ 250 on the enterprise value per tonne (EV/tonne) basis as per FY07 numbers.

The company has lined up capacity expansion plans to increase volumes and maintain market share. One must bear in mind that the current growth is led more by improved sales realisations than volumes. While the southern region is expected to witness demand growth in line with industry growth rate, once the lined up capacities come on stream as per schedule, the industry is expected to face excess supply situation. Thus, the current high realisations may not sustain in future, in turn impacting returns to shareholders. Hence caution needs to be exercised, as while the medium term scenario is favourable, from a long-term standpoint the stock is fairly valued.

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