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India Cements: Top up, bottom down - Views on News from Equitymaster
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India Cements: Top up, bottom down
Jan 25, 2010

Performance summary
  • Revenues grow by 14.5% YoY during 3QFY10, led by growth in volumes
  • Operating profits decline by 35% YoY as costs outpace growth in topline.
  • Profit before tax declines nearly by 64% YoY on account of dismal show at the operating level, lower other income and substantial increase in depreciation cost.
  • Fall at the net profit level stands at nearly 44% YoY. The decline in bottomline is at a slower pace on account of lower tax outgo and extraordinary income (notional foreign exchange gain).


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY09 Change
Net sales 7,548 8,641 14.5% 25,410 28,070 10.5%
Expenditure 5,747 7,476 30.1% 17,703 21,065 19.0%
Operating profit (EBITDA) 1,801 1,165 -35.3% 7,708 7,006 -9.1%
EBITDA margin (%) 23.9% 13.5%   30.3% 25.0%  
Other income 141 119 -15.7% 338 241 -28.7%
Interest 293 299 1.9% 772 1,058 37.1%
Depreciation 513 573 11.8% 1,500 1,716 14.4%
Profit before tax/(loss) 1,136 412 -63.8% 5,774 4,474 -22.5%
Extraordinary item (132) 117   (645) 314  
Tax 385 180 -53.2% 1,746 1,627 -6.8%
Net profit 619 348 -43.8% 3,383 3,160 -6.6%
Net margin (%) 8.2% 4.0%   13.3% 11.3%  
No of shares (m)       281.9 282.4  
Diluted EPS (Rs)*         14.5  
P/E (times)         7.8  
*trailing twelve month earnings

What has driven performance in 3QFY10?
  • India Cements reported double digit growth in revenues of 14.5% YoY during 3QFY10. This was on account of robust growth in volumes. Cement sales during the quarter were up by 33% YoY. The company was able to cater to the rising demand on account of its expansion and upgradation plans. Demand recovery is visible. Barring Andhra Pradesh (AP) the other Southern regions are registering growth. The ongoing agitations in AP have compounded the growth problems.

  • Despite such robust growth in volumes, growth in revenues has been slower. The same has been the result of steep fall in realisations owing to commissioning of new capacities. The company’s revenues also include income from IPL franchise and freight earnings. However, the contribution to the total revenues is not significant and hence not reported separately. However, this makes difficult to calculate the net cement realisations of the company. As per the details disclosed during the conference call, the cement per bag prices in the Southern region have witnessed sharp decline. The approximate average decline in prices is over 20%.

  • Operating profits declined by 35% YoY as costs grew at a faster rate as compared to the topline. The cost of operations increased by 30% YoY during the period under consideration. This is mainly on account of higher cost of raw materials and transportation and handling charges. The raw material costs are on a higher side on account of increase in clinker production, higher fly ash costs and sustained higher royalty charges on limestone. Apart from this, the normal bout of cost increases through increase in salaries and wages, increase in advertisement and marketing costs also exerted pressure on margins. All of this led to 10.4% contraction in EBIDTA margins.

  • Profit before tax declined nearly by 64% YoY. This was on account of a dismal show at the operating level, lower other income and substantial increase in depreciation cost. The planned capital expenditure has led to increase in asset replacement costs.

  • The fall at the net level stood at 43.8% YoY. Net profits have declined at a slower rate on account of lower tax outgo. The decline in profits is also arrested by extraordinary income that includes notional foreign exchange gain reported during the quarter as against loss booked during the corresponding quarter previous year.

What to expect?
The industry is likely to maintain its growth momentum and continue growing volumes at around 9% to 10% in the medium to long term. However, the upcoming planned capacities are likely to exert pressure on the realisations, impacting margins. The same has already started taking place. While the medium term growth prospects of the Indian cement industry have been impacted, the long term growth story remains intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run.

At the current price of Rs 113, the stock is trading at a fair valuation of over Rs 3,800 on the enterprise value per tonne (EV/tonne) basis as per FY09 numbers. The company has lined up capital expenditure expansion plans to increase volumes and support smooth functioning of plant by way of setting up captive power plants. While this is a positive move from a long-term perspective, the rising costs coupled with expected softening of realisations will arrest growth in the medium term.

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