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India Cements: Low base effect! - Views on News from Equitymaster

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India Cements: Low base effect!
Feb 12, 2007

Performance summary
India cements, the largest player in Southern India, has reported robust results for the third quarter ending December 2006. On the back of improved realisations, the company has reported a strong 36% YoY growth in topline. The corporate debt-restructuring (CDR) programme helped the company turnaround in FY05. While operating profits more than doubled, the net margins have expanded by a huge 1,480 basis points. The rising cement prices coupled with increased capacity utilization and financial restructuring has led to expansion of margins.

Financial performance snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 3,466 4,724 36.3% 11,190 14,740 31.7%
Expenditure 2,999 3,394 13.2% 9,344 10,028 7.3%
Operating profit (EBITDA) 468 1,331 184.4% 1,846 4,712 155.2%
EBITDA margin 13.5% 28.2%   16.5% 32.0%  
Other income 37 17 -53.2% 55 80 46.2%
Interest 296 347 17.2% 1,175 1,100 -6.4%
Depreciation 197 198 0.7% 592 583 -1.5%
Profit before tax/(loss) 12 803 6761.5% 134 3,109 2221.7%
Tax 6 5 -16.7% 18 12 -33.0%
Extraordinary Itmes 67 -   67    
Profit after tax/(loss) 72 798 1005.0% 182.8 3096.9 1594.1%
Net margin 2.1% 16.9%   1.6% 21.0%  
No of shares (m) 191 220   191 220  
Diluted EPS (Rs)*         15.8  
P/E (times)         13.0  
*trailing twelve month earnings

What is the company's business?
India Cements is a Southern player with an installed capacity of about 9 MTPA. The company enjoys approximately 20% market share and is the largest producer of cement in the South and a leading exporter. The Company has access to huge limestone resources and plans to expand capacity by de-bottlenecking and optimisation of existing plants as well as by acquisitions. The company has 7 plants out of which 3 are in Tamilnadu and 4 in Andhra Pradesh. The company caters to all major markets in South India and Maharashtra. The company’s product portfolio comprises of Ordinary Portland Cement (OPC) and Pozzolona Portland Cement (PPC) in the ratio of 53.4% and 46.6%. However, the company is increasing its focus on blended cements.

What has driven performance in 3QFY07?
Improved sales realisation: Led by strong demand growth and better realisations, the company has achieved 36% YoY growth in topline. The company’s continuous efforts to increase production of blended cement helped further boost topline growth. This coupled with improved realisations led to substantial growth in topline. The company was operating at near 100% capacity utilization (almost at 94%) in FY06, which, given the strong demand scenario would have further increased during 3QFY07.

Concerns over rising costs continue: Over a period of time, the company has made continuous efforts to ease cost pressure by reducing administration and sales promotion expenses and also by way of reduction in power consumption. However, increase in power tariff, royalty on limestone, freight costs and increase in cost of indigenous coal has resulted into increased cost pressure. Though operating costs have increased by 13% YoY, record high cement prices have more than compensated for the same, thus enabling the operating margins to expand by 1,470 basis points.

Cost break-up (% of Sales) 3QFY06 3QFY07
Consumption of raw material 11.7% 12.7%
Staff cost 5.9% 5.1%
Power and fuel 33.0% 25.2%
Other expenditure 17.1% 12.6%
Transportation and handling 18.9% 16.3%
Total Cost 86.5% 71.8%

Zooming bottomline: The company underwent a corporate debt-restructuring (CDR) programme in September 2002 and recorded a turnaround in FY05. While buoyant cement prices have indeed helped boost the bottomline, it is the lower base of the previous fiscal that has resulted into a more than 10 times growth in net profits.

What to expect?
At the current price of Rs 206, the stock is trading at a price to earnings multiple of 13 times trailing twelve month earnings. While the CDR package and consequent turnaround is a big positive, the company is trading well above its replacement cost thus making it vulnerable to any fall in prices. As such, caution needs to be exercised.

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