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India Cements: Volumes drive topline growth - Views on News from Equitymaster

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India Cements: Volumes drive topline growth

May 18, 2010

India Cements has announced its FY10 results. The company has reported a 10% YoY growth in sales, while net profits have declined by 18% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10% YoY during FY10 mainly led by double digit growth in volumes.
  • Operating profits decline by 17% YoY as costs continue to outpace growth in topline.
  • Profit before tax declines by 33% YoY. This is on the back of poor show at the operating level, lower other income and higher depreciation and interest costs.
  • Fall at the net profit level stands at nearly 18% YoY. The decline in bottomline is at a slower pace on account of lower tax outgo and extraordinary income (notional foreign exchange gain).

(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales    8,869    9,643 8.7%   34,279   37,713 10.0%
Expenditure    6,615    8,383 26.7%   24,317   29,448 21.1%
Operating profit (EBITDA)    2,255    1,260 -44.1%     9,962     8,266 -17.0%
EBITDA margin (%) 25.4% 13.1%   29.1% 21.9%  
Other income          131        129 -2.1%         470         370 -21.3%
Interest        350        369 5.4%     1,122     1,426 27.2%
Depreciation        533        616 15.5%     2,033     2,331 14.7%
Profit before tax/(loss)    1,503        404 -73.1%     7,277     4,878 -33.0%
Extraordinary item      (149)        122         (794)         436  
Tax        415        143 -65.7%     2,161     1,770 -18.1%
Net profit        939        383 -59.2%     4,322     3,543 -18.0%
Net margin (%) 10.6% 4.0%   12.6% 9.4%  
No of shares (m)          282.4     307.2  
Diluted EPS (Rs)*                  5.8  
P/E (times)                20.1  
*trailing twelve month earnings

What has driven performance in FY10?
  • India Cements reported double digit growth in revenues of 10% YoY during FY10. This was on account of robust growth in volumes. During the conference call the management has indicated that their clinker sales were higher by 24% YoY and cement sales were up by about 20% YoY. The company has also indicated that the net plant realisations dropped by about 9.9% YoY during FY10. Thus, it was the fall in cement prices witnessed during 2HFY10 that arrested the overall growth. The company is a major player in the southern region. The region had witnessed sharp price correction in 2HFY10. Primarily it was on account of increase in supply with planned capacities becoming operational. The dispatches were also lower owing to operational issues like shortage of power availability and wagons.

  • Operating profits declined by 17% YoY as costs grew at a faster rate as compared to the topline. The operational costs for the company went up primarily on account of higher coal costs, power cost, employee and freight costs. Rising coal prices resulted in higher cost of key input material. Power and fuel costs were on a higher side as company purchased power from the power exchange and form some outside parties. This is because in Tamil Nadu there is 20% power cut, while in Andhra Pradesh power cut takes place three days in a week. It satisfies its 40% of requirements by way of backup generators. To ensure smooth functioning of the plants the company has to depend on expensive outside power. The purchased power cost is higher by Rs 4 to 4.5 per unit basis.

  • The employee costs were up owing to provision made with regards to AS15 (unveiled leave portion salary) and superannuation fund. And the freight cost were higher because the company has moved goo quantity of cement output out of normal marketing zone (moved to east, long lead northeast regions). This is because realisations in these regions were far better as compared to southern markets. The company preferred to incur higher fright costs to cushion stained operating margins.

  • The cost of operation increased by 30% YoY during the period under consideration. This is mainly on account of higher cost of raw materials and transportation and handling charges. The raw material costs are on a higher side on account of increase in clinker production, higher fly ash costs and sustained higher royalty charges on limestone. Apart from this the normal bout of cost increases through increase in salaries and wages, increase in advertisement and marketing costs also exerted pressure on margins. All of this led to 10.4% contraction in EBIDTA margins.

  • Profit before tax declined nearly by 33% YoY. Apart from poor show at the operating level, lower other income and higher depreciation and interest costs led to lower profits. However, fall in bottomline was lower at around 18% YoY. This is because of lower tax outgo and extraordinary income (notional foreign exchange gain).

What to expect?
The company has lined up capital expenditure expansion plans to increase volumes and is setting up captive power plants to ensure smooth functioning of plants. It has also acquired stake in Indo Zinc, Rajasthan based company, in order to mark its presence in Northern region. It has also acquired coal mining rights in Indonesia to meet the requirements of coal for power generation and to meet in part requirements of coal for cement manufacture. From a long term perspective these are positive moves.

At the current price of Rs 116, the stock is trading at a fair valuation of over Rs 3,300 on the enterprise value per tonne (EV/tonne) basis as per FY09 numbers. The stock as such looks attractively priced. However, concerns do prevail. The rising costs coupled with expected softening of realisations will arrest growth in the medium term.

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