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India Cements: Profitability blues - Views on News from Equitymaster
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India Cements: Profitability blues
Jul 1, 2009

Performance summary
  • During FY09, the company reports 9.5% YoY growth in topline, led by improved realisations.
  • Operating profits fall by 8.8% YoY.
  • Rising cost of operations exerts pressure on profitability.
  • Profit before tax declines by 17.6% YoY on the back of lower operating profits and higher depreciation.
  • Net profits decline by 32% YoY. Excluding the extraordinary item, the fall in net profits is lower at 24% YoY.
  • The board approves the issue of equity linked securities for an aggregate sum not exceeding US$ 100 m. The same is subject to shareholders’ approval.
  • The board recommends a dividend of Rs 2 per share. This translates into a dividend yield of 1.5%.


Financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 9,916 9,802 -1.2% 35,680 39,076 9.5%
Expenditure 7,152 7,547 5.5% 24,751 29,113 17.6%
Operating profit (EBITDA) 2,764 2,255 -18.4% 10,929 9,962 -8.8%
EBITDA margin (%) 27.9% 23.0% 30.6% 25.5%
Other income 242 131 -45.7% 275 470 70.8%
Interest 229 350 52.8% 1,099 1,122 2.1%
Depreciation 390 533 36.7% 1,279 2,033 58.9%
Profit before tax/(loss) 2,387 1,503 -37.0% 8,827 7,277 -17.6%
Extraordinary item (533) (149) (380) (794)
Tax 810 415 -48.7% 2,071 2,161 4.4%
Net profit 1,044 939 -10.1% 6,375 4,322 -32.2%
Net margin (%) 10.5% 9.6% 17.9% 11.1%
No of shares (m) 281.9 282.4
Diluted EPS (Rs)* 15.3
P/E (times) 8.6
*trailing twelve month earnings

What has driven performance in FY09?
  • India Cements witnessed a 9.5% YoY growth in topline during FY09 on the back of improved realisations. The company reported lower volumes during the year on account of expansion delays, unscheduled stoppages owing to power cuts and repairs and maintenance. The cement production during the year was lower by 1.3% as compared to the previous year, while dispatches reported a fall of 1.1% YoY. However, the company sees the operations stabilizing June onwards with 14 MT of capacity in place and a steady demand growth.

  • Operating profits declined by 8.8% YoY during the year as the cost of operations grew at a faster rate compared to the topline growth. The increased coal prices and depreciating Rupee caused much of the damage. The other cost heads also exerted pressure on margins. The transportation charges increased owing to an increase in the busy season surcharge by railways during the year, while employee costs were higher owing to an increase in managerial remuneration and onetime bonus component. The power and fuel costs rose as cost of generation went up. All of this resulted in a 5.1% YoY contraction in EBITDA margins.

  • Profit before tax declined by 17.6% YoY on the back of lower operating profits and higher depreciation. This coupled with extraordinary expenses led the net profits to register a steep decline of 32.2% YoY. The extraordinary expense reported includes forex translation loss, while there was a gain during the same period last year. Excluding the same, the fall in net profits is lower at 24% YoY.

What to expect?
At the current price of Rs 132, the stock is trading at a fair valuation of over Rs 3,600 on the enterprise value per tonne (EV/tonne) basis as per FY09 UA numbers. The company has lined up capacity expansion plans to increase volumes and maintain market share. While this is a positive move from a long-term standpoint, the rising costs coupled with expected softening of realisations will pressurise margins in the medium term.

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