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India Cements: Restructuring benefits, but...

Feb 4, 2004

India Cements, the largest producer of cement in the Southern region, has registered an improved performance during 3QFY04 as compared to the same quarter last year. Riding on the back of rise in demand as well as improvement in realisations, the company has been able to bring down its losses by a significant 26% on a YoY basis. Reduction in interest outgo and rationalisation of operational costs also helped the company prune its losses.

(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Net sales 1,980 2,325 17.5% 6,451 7,258 12.5%
Other income 9 8 -18.3% 44 25 -43.4%
Expenditure 1,926 2,145 11.3% 6,206 6,443 3.8%
Operating profit (EBDITA) 53 180 238.9% 245 815 233.4%
Operating profit margin (%) 2.7% 7.8%   3.8% 11.2%  
Interest 605 386 -36.3% 1,761 1,183 -32.8%
Depreciation 205 204 -0.4% 612 611 -0.2%
Profit before tax (748) (402) -46.2% (2,085) (954) -54.2%
Extraordinary items (33) 30   (98) 101 203.9%
Tax (275) -   (766) (168) -78.1%
Profit after tax/(loss) (505) (372) -26.3% (1,416) (685) -51.7%
Net profit margin (%) -25.5% -16.0%   -22.0% -9.4%  
No. of shares (m) 138.6 138.6   138.6 138.6  
Diluted earnings per share (Rs)* (14.6) (10.7)   (13.6) (6.6)  
P/E ratio (x)            
(* annualised)            

While the figures for YoY growth in demand as well as realisations during 3QFY04 are not available, the growth in sales volumes of cement for the 9 months ended December 2003, stood at 4.2% on a YoY basis. This growth is lower than the industry growth rate of near 5% during the same period. Realisations, which remained low during the first two quarters, witnessed a partial recovery in mid November 2003 and played an important role in the company's robust 18% YoY growth in topline during 3QFY04. Going forward, while the realisations are expected to remain subdued on account of high demand supply imbalance in the southern region, the company's principal market, volume growth is expected to be relatively lower than the overall industry growth rate.

Operational performance...
(% of net sales) 3QFY03 3QFY04
Raw materials 10.1% 12.5%
Staff cost 9.9% 9.1%
Power & fuel 37.5% 36.9%
Freight 13.9% 16.2%
Other expenditure 25.9% 17.6%
Total 97.3% 92.3%

The company has also managed to improve its operating performance. On account of reduction in administration and sales promotion expenses and also reduction in power consumption, the operating margins of the company have improved by a healthy 510 basis points. Had it not been for the rise in freight costs on account of higher diesel prices, the operating margins would have looked even better. Although the company has done well to improve its operating margins, it is still substantially lower than its rival Madras Cements (operating margins of 22.3% during 3QFY04). Higher staff costs and power expenses seem to be the areas where there is a substantial scope for improvement and the company is taking steps to rectify the same.

With the reduction of total workforce by another 611 people, the wage bill is expected to further come down. Moreover, with the company's new waste heat recovery plant for power generation of 7.8 MW expected to be commissioned by April 2004, the power expenses are also likely to come down. Hence, on account of these measures, the operating margins of the company are likely to improve going forward.

Besides grappling with lower operating margins, the company will also have to worry about its higher financial leverage. Although, the company has managed to bring down its interest expenses by a significant 36% during the third quarter, the interest coverage of the company is still under 1, thus making it impossible for the company to be profitable beyond the operational level. Although, the debt restructuring of the company has been approved by most of the lenders, it remains to be seen how fast the company would be able to turn profitable beyond the operating profits level.

The stock is currently trading at Rs 38. The stock has appreciated by almost 100% in the past one year on the back of the benefits of the restructuring exercise that will accrue to the company. But the company is yet to come out of the red and moreover the low level of operating margins also fail to inspire confidence in the company. Therefore, investors should exercise caution, as the risks associated with investing in the company are high and should consider investing in companies, which have lower financial leverage and better operating margins.

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