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India Cements: Restructuring awaited

Jul 3, 2003

India Cements, the troubled south Indian cement producer, has reported another year of disappointing results. The company has reported a net loss of Rs 2 bn on the back of a significant 16% fall in topline. A drastic fall in realisations as well as a considerable rise in interest expenses has taken a toll on both the topline as well as the bottomline of the company in FY03. In fact, the company's losses have been mitigated to a certain extent by the tax writeback. Not accounting for the writeback, India Cements' losses would have been higher at Rs 3 bn.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net Sales 2,207 2,065 -6.4% 10,191 8,516 -16.4%
Other Income 1,207 17 -98.6% 1,247 61 -95.1%
Expenditure 2,317 1,946 -16.0% 8,584 8,250 -3.9%
Operating Profit (EBDIT) (109) 119 -209.1% 1,607 266 -83.4%
Operating Profit Margin (%) -5.0% 5.8%   15.8% 3.1%  
Interest 440 825 87.6% 2,054 2,585 25.8%
Depreciation 278 202 -27.6% 875 814 -7.0%
Profit before Tax 379 -890 -334.5% -76 -3,072  
Extraordinary items - -   - -  
Tax - (292)   (68) (1,059)  
Profit after Tax/(Loss) 379 -598   -8.1 -2013.7  
Net profit margin (%) 17.2% -28.9%   -0.1% -23.6%  
No. of Shares 139 139   139 139  
Diluted Earnings per share*            
P/E Ratio            
(* annualised)            

The company has been severely hit by cement realisations that fell during the early part of FY03. While prices recovered by the latter half of FY03, they were still not strong enough for India Cements to arrest the fall in its topline. By our estimates and from the data given out by the company, realisations seem to have fallen by close to 35%. The company has also not been able to compensate for low prices by increasing volumes. The sales volumes of the company have risen by 3%, which is much lower than the industry average of 9% for FY03. We believe that increased competition by major players like ACC, which has expanded its capacity in the southern region, seems to have eaten into the market share of the company.

Due to the adverse realisations scenario, operating margins of the company have fallen drastically by nearly 1,200 basis points. While the company has indicated that it has increased the proportion of blended cement as well as reduced its logistics costs, poor realisations have completely overshadowed these measures. India Cements also saw a significant rise in interest expenses. This was mainly because, its debt restructuring package effective from January 2003 does not seem to have taken off.

The stock is currently trading at Rs 24. It has found strength in the March quarter, in anticipation of the debt restructuring program announced by the company. However, India Cements is likely to face pressure on its topline going forward. This is due to the fact that there is still a large oversupply in the southern market and competition is slowly eating in to the market share of the company. When most of the other cement majors have managed to improve their position in the latter half of FY03, India Cements failed to show much progress on the sales volume front. This is considering the fact that the demand scenario had improved in the second half of FY03. The stock may continue to stagnate at this level until concrete gains of the restructuring program surface.

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