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India Cements: A brief overview!

Mar 5, 2007

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. Increasing capacity utilization will lead to volume growth. With increased volumes and favourable pricing scenario, the company is and will continue to enjoy better realisations till the new capacities become operational. Historically, the southern region has faced a situation of excess supply, which is expected to continue going forward as well, as new announced capacities come on stream leading to downward pressure on prices, which will impact realisations and hence the margins of the company going forward. To maintain its market share, the company plans to expand its capacity by 4 MTPA in two phases by 2010. The investment outlay of the first phase, which entails 2 MTPA capacity expansion plan (to be commissioned FY08), is estimated at Rs 3.5 bn. This will be funded out of the Foreign Currency convertible Bonds (FCCBs) issued by the company in May 2006. The dual taxation structure in Tamil Nadu linked to the selling price of cement has been withdrawn and has been replaced by a 14% single Sales Tax on cement, the benefits of which have begun to reflect since FY07. Reduced tax burden will reduce pressure on net margins.

The company being a southern player is more exposed to price risk during a downturn. The company uses imported coal as fuel for its cement plants, increasing its exposure to coal price volatility. This may impact cost of production if prices of imported coal strengthen.

Financial Overview: The company underwent a corporate debt-restructuring (CDR) programme in September 2002, on account of its inability to deliver financial obligations during the downturn in the South. However, the company witnessed a turnaround in FY05. In the last 3 years the company's revenues and operating expenses have grown at a CAGR of almost 22% and 16% respectively. The rising cement prices coupled with increased capacity utilization and financial restructuring has led to expansion of margins. In FY05, apart from the benefits of CDR programme, extraordinary income (representing remission in liability arising out of repayment of some of the existing debt), resulted in the company reporting net profits of Rs 45 m as against a net loss in the previous year.

The company has also managed to improve its operating performance. On account of reduction in administration, sales promotion expenses and power consumption and the continuous efforts of the company to increase production of blended cement, the margins have improved from 9.9% in FY04 to 16.9% in FY06. However, increase in power tariff, royalty on limestone, freight costs and increase in cost of indigenous coal resulted in increased cost pressure. In the recent past operating costs of the company have grown at CAGR of 16%, while operating profits have grown at a compounded rate of around 114% on account of better realisations and improved physical performance.

In FY06, the net sales of the company increased by almost 33% YoY on account of increased utilization level (cement production growth was 32% YoY and capacity utilization stood at 94%) and better realisations. Though the total operating costs went up by almost 25% YoY and other income declined by 73% YoY, the operating profits registered a growth of 91% YoY on account of improved physical performance and favourable pricing scenario.

Sales (Rs m)10,169 11,621 15,418
% growth19.4%14.3%32.7%
OPM (%)9.9%11.7%16.9%
NPM (%)-9.4%0.4%2.9%
Financial Ratio
Debt to Equity1.21.30.8
Interest coverage ratio1.11.62.3
Return Ratios   
P/BV  2.3

To conclude…
At the current price of Rs 159, the stock is trading at a price to earnings multiple of 10 times its trailing twelve-month earnings. The company has lined up capacity expansion plans to increase volumes and maintain market share. Realisations in the future may not be as attractive as they have been at the current levels, as new projects are expected to come on stream by the end of 2008 to meet the robust demand growth. Given the fact that the current topline growth has been driven more by better realisations than volumes, caution needs to be exercised as in the future the current level of higher realisations may not sustain. In FY06, the company was able to deliver returns to the investors after a long gap (of almost 4 years). While the benefits of restructuring kicked in, it must be borne in mind that the realisations are at all time highs. Thus, while the medium term scenario is favourable, from a long-term standpoint risks outweigh rewards.

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