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India Cements: Catch 22 situation - Views on News from Equitymaster
 
 
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  • Feb 17, 2003

    India Cements: Catch 22 situation

    India Cements, the largest cement producer in the Southern India, has reported another quarter of huge losses. On a YoY basis, the company has reported a 19% decline in its topline while net losses have risen almost five fold in 9mFY03. Results for 3QFY03 were better than its 2QFY03 performance (25% topline decline YoY). However, this was of little consolation as in 3QFY03 topline dipped by 10% YoY and net losses almost doubled. Had it not been for a deferred tax credit of Rs 275 m during the quarter, losses would have almost tripled in 3QFY03.

    (Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
    Net Sales 2,207 1,980 -10.3% 7,984 6,451 -19.2%
    Other Income 7 9 27.4% 40 44 9.9%
    Expenditure 1,775 1,959 10.4% 6,268 6,304 0.6%
    Operating Profit (EBDIT) 433 21 -95.2% 1,717 147 -91.5%
    Operating Profit Margin (%) 19.6% 1.0% 21.5% 2.3%
    Interest 506 605 19.6% 1,615 1,761 9.0%
    Depreciation 197 205 4.4% 597 612 2.6%
    Profit before Tax -263 -780 197.2% -455 -2,182 380.1%
    Extraordinary items - - - -
    Tax - (275) - (767)
    Profit after Tax/(Loss) -263 -505 -455 -1415
    Net profit margin (%) -11.9% -25.5% -5.7% -21.9%
    No. of Shares 139 139 139 139
    Diluted Earnings per share* -7.6 -14.6 -4.3 -13.6
    P/E Ratio
    (* annualised)

    Fall in topline can be mainly attributed to a drastic fall in cement realisations. For 3QFY03, gross realisations have fallen by 21%, while for the nine-month period the fall has been to the tune of 20%. Volumes on the other hand, have grown by 17% during the quarter. For the nine-month period, volume growth has been at 5%. The company has stated that demand has risen by 15% in 3QFY03, but higher supply seems to have more than offset growth in volumes. In FY02, both ACC and Gujarat Ambuja have set up huge capacities in the Southern and Western regions respectively. This has led to a glut of cement supply in these regions, as the cement output of Gujarat Ambuja's Chandrapur plant in western region may be finding its way into the southern markets.

    Operating expenses have risen considerably by 10%. This coupled with falling sales have almost wiped out the entire operating profits of the company during the December quarter. What is disturbing however, is the fact that despite the soft interest rate scenario, the company has been unable to reduce its interest expenses. As a measure to reduce its high debt obligations, the company has resorted to distress sale of its cement plants. India Cements has already sold its subsidiary, Shri Vishnu Cement, for a sum of Rs 3.9 bn in FY02 to Zuari Cement. It has already floated plans to sell its other cement subsidiaries viz. Visaka Cement and Raasi Cement. As a precautionary measure, the company has proposed a debt-restructuring plan to its lenders. Depreciation charges have also risen. All these factors have led to a near tripling of the loss before tax in 3QFY03. A deferred tax asset of Rs 275 m has however limited net losses to Rs 505 m.

    The stock is currently trading at Rs 16. Poor performance has already pushed the stock down considerably. It is disturbing see India Cementís dismal run continue in the December quarter, when most of the other cement majors have managed to improve their position in the December quarter after facing a poor cement realisations scenario in the first half of FY03. Even Madras Cements, another south based cement major, has shown a better performance in the December quarter.

    In the short term, the topline of the company is likely to face increasing pressure due to competition from ACC and Gujarat Ambuja, who have set up new capacities to cater to the Southern markets. On the realisations front, due to its regional presence, the companyís bargaining power is lower and consequently, realisation growth seems unlikely. In the long term, the company's performance will depend heavily on whether it is able to develop new markets in other regions of the country. Until then, one will not be surprised if the stock price languishes at the current levels.

     

     

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