India Cements: It's a fifer - Views on News from Equitymaster

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India Cements: It's a fifer

May 16, 2007

Performance summary
India cements, the largest player in Southern India, reported outstanding results during fourth quarter and full year ended march 2007. On the back of increased volume and firm prices, the company achieved 36% YoY growth in topline and highest ever net profits. The corporate debt-restructuring (CDR) programme helped the company turnaround in FY05. Though the input costs scaled up, operating margins stood at 33% during 4QFY07, mainly driven by better sales realisation. On account of restructuring, buoyant cement prices and lower base, the company has reported five fold growth in net profits. The full year results are also impressive as the topline has grown by 33% YoY and there has been a near 10-fold growth in net profits.

Financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 4,228 5,758 36.2% 15,418 20,497 32.9%
Expenditure 3,464 3,852 11.2% 12,808 13,880 8.4%
Operating profit (EBITDA) 764 1,906 149.5% 2,610 6,617 153.6%
EBITDA margin 18.1% 33.1%   16.9% 32.3%  
Other income 18 22 21.7% 73 102 40.1%
Interest 314 331 5.2% 1,489 1,430 -4.0%
Depreciation 197 194 -1.6% 789 777 -1.5%
Profit before tax/(loss) 270 1,403 419.3% 404 4,512 1016.5%
Tax 29 5 -82.8% 47 17 -64.0%
Extraordinary Itmes 29 - -100.0% 96 - -100.0%
Profit after tax/(loss) 270 1,398 417.2% 453 4495 892.1%
Net margin 6.4% 24.3%   2.9% 21.9%  
No of shares (m)       191 220  
Diluted EPS (Rs)*         20.7  
P/E (times)         8.8  
*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 4QFY07?
Robust demand: The strong demand growth and improved realisations continue to drive the topline of the company during 4QFY07. On the back of almost 32% YoY growth in net realizations, the company achieved 36% YoY growth in topline in the last quarter of the financial year FY07. While production was higher by 4%, despatches grew by 3.7% YoY as compared to the same period last year, which has further fuelled the topline growth. Robust demand from the housing and infrastructure sectors resulted in stellar performance by the company.

Costs- bringing them under control: 150% YoY growth in operating profits has been achieved by the company on account of improved sales realisations and the company's continuous efforts to reduce costs by reducing power consumption and administration and sales promotion expenses. Though costs have increased by 11%YoY basis as a percentage of sales, on a cost per tone basis they have increased by 7% YoY. Except for power and fuel costs and raw material costs, all the other cost heads have scaled upwards on cost per tonne basis. Raw material costs were a tad lower during 4QFY07 as compared to the same period last year, however, for the same period under consideration, power and fuel costs declined by 7% YoY on cost per tonne basis. Increase in staff cost reflects the inflationary pressure, while increase in transportation and handling has been fallout of transporters increasing freight rates in light of rising liquid fuel prices.

Cost break-up (% of Sales) 4QFY06 4QFY07
Consumption of raw material 15.8% 11.9%
Staff cost 4.7% 4.4%
Power and fuel 30.0% 21.2%
Other expenditure 14.0% 13.0%
Transportation and handling 17.5% 16.4%
Total Cost 81.9% 66.9%

Fivefold growth in net profits: On account of restructuring, buoyant cement prices and a lower base effect, the company has reported a five-fold growth in net profits. 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. A huge 1,500 basis points expansion in operating margins and lower tax outgo has resulted into an equally impressive 1,790 basis points expansion in net margins.

What to expect?
At the current price of Rs 183, the stock is trading at a price to earnings multiple of 8.8 times trailing twelve month earnings. While the benefits of restructuring have duly kicked in, it must be borne in mind that the realisations are at all time highs. Further, any decline in realisations will affect company adversely as the current growth is more led by improved sales realisations rather than volumes and efficiency. Thus, while the medium term scenario is favourable, from a long-term standpoint risks outweigh rewards.

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