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India Cements: Other income boost… - Views on News from Equitymaster
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India Cements: Other income boost…
Jul 8, 2008

Performance summary
  • Topline grows by 73% YoY in FY08 on the back of firm realisations and volume growth.
  • EBITDA margins contract by 200 basis points (2%) as costs exceed growth in net sales.

  • Net profits grow 42% YoY, significantly lower than the growth in operating profits, mainly due to higher depreciation and tax outgo.

  • For the fourth quarter, while topline has grown by 70% YoY, net profits have fallen 25% YoY.

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 5,758 9,781 69.9% 20,551 35,557 73.0%
Expenditure 3,852 7,152 85.7% 13,934 24,836 78.2%
Operating profit (EBITDA) 1,906 2,629 37.9% 6,617 10,721 62.0%
EBITDA margin (%) 33.1% 26.9%   32.2% 30.2%  
Other income 22 325 1385.4% 103 615 499.6%
Interest 331 229 -30.7% 1,430 1,099 -23.2%
Depreciation 194 390 101.0% 778 1,281 64.5%
Profit before tax/(loss) 1,403 2,335 66.4% 4,511 8,957 98.6%
Tax 5 810 16090.0% 18 2,073  
Extraordinary items - 481   40 481  
Share of profit/loss of associate companies - -   - 13  
Net profit 1398 1044 -25.3% 4533 6416 41.5%
Net margin (%) 24.3% 10.7%   22.1% 18.0%  
No of shares (m)       220 281.9  
Diluted EPS (Rs)*         22.8  
P/E (times)         6.1  
*trailing twelve month earnings

What has driven performance in FY08?
  • India Cements reported 73% YoY growth in topline on account of robust growth in realisations and volumes. The company has exceeded industry growth (8% YoY) by reporting volume growth of 10% YoY. The company is operating at optimum capacity utilization levels, hence there little or no scope to grow volumes further. However, to increase volumes, the company has increased blending ratio from 67% to 80% levels.

  • In FY08, the company witnessed 58% YoY growth in realisations. Thus, the current growth is led more by realizations than volumes. The company has outlined plans to expand capacity to increase volumes. This however, is an industry wide scenario and once the capacities come on stream, the high realisations will get pressurized, impacting margins.

    Cost break-up
    (% of sales) 4QFY07 4QFY08 FY07 FY08
    Consumption of raw material 11.9% 8.2% 10.8% 8.0%
    Staff cost 4.4% 5.3% 4.7% 5.3%
    Power and fuel 21.2% 20.3% 23.9% 19.5%
    Other expenditure 13.0% 25.6% 12.5% 24.1%
    Transportation and handling 16.4% 13.7% 15.9% 12.9%

  • Operating profits grew by 62% YoY on account of strong growth in realisations. However, increased realizations were unable to fully compensate the hike in operational cost, resulting into 2% contraction in EBITDA margins. The company has witnessed 63% YoY growth in cost on a per tonne basis.

  • The rising fuel costs have scaled up power and fuel and transportation charges. Further, the company is dependant on imported coal. The cost of coal has not only moved upwards but the shipment cost of the same has scaled up on account of rising freight costs. Going forward, to restrict the pressure exerted on margins by rising costs, the company has planned to acquire freight ships and secure long term coal off-take arrangements.

  • A near six-fold growth in other income resulted in 42% YoY growth in net profits in FY08. Excluding the same, net profits have grown by 31% YoY.

  • Courtesy increased cash flows, the company has reduced its debt burden from 1.8 in FY04 to 0.3 in 9mFY08. The same has benefited the company in terms of lower interest costs. However, depreciation has scaled up on account of capacity expansion plans. The company has outlined plans to increase its capacity from 8.9 MTPA in FY08 to 14.2 MTPA by Dec 2008. In the second Phase of expansion plan, the company chalked out plans to foray in the Northern region and scale up the capacity to 18 MTPA by FY10.

  • The company owns an IPL (Indian Premiere League) franchise for the Chennai team at approximately Rs 3.6 bn payable over 10 years. The company had indicated that the move is a part of the company’s long-term marketing plan, which has propelled its other expenditure. The company witnessed tax shelters till FY07 and with the same getting exhausted in FY08; it has resulted in higher tax outgo.

What to expect?
At the current price of Rs 138, the stock is trading at an expensive valuation of over US$ 100 on the enterprise value per tonne (EV/tonne) basis as per FY08 estimated 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 medium term. Hence, caution needs to be exercised.

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