Jul 16, 2008|
Prism Cement: A brief overview
Prism Cement, promoted by the Rajan Raheja Group (RRG) was initially incorporated under the name of Karan Cement Limited in March 1992 as a joint venture between Raheja group of Mumbai, F.L.Smidth & Co. A/s Denmark and Industrialization Fund for Developing Countries (IFU), Denmark. The company commissioned operations in August 1997 with a clinkerisation plant having an installed capacity of 2 MT in the country at Satna, Madhya Pradesh and was the single largest kiln at that point of time. In 2004, FLS and IFU sold their entire stake to RRG. Currently, the promoter group holds 62% stake in the company. The company manufactures and markets Portland Pozzollana Cement (PPC) with the brand name 'Champion' and the full range of Ordinary Portland Cement (OPC) grades. The company caters mainly to markets of Eastern UP, North Eastern MP and Western Bihar, which are within the radius of 360 kms of its plant at Satna, MP.
Capacity and capacity utilization: Prism Cement's total manufacturing capacity stands at nearly 2.5 MTPA. The company has undertaken an aggressive capital expenditure plan after having operated at nearly 100% capacity utilisation level since the last five fiscals. The company had not increased its capacity in the past. However, it has been able to improve production and hence supply of cement, both of which have grown at a CAGR of nearly 10% in the past five years. The growth has been backed by an improved product mix and optimum capacity utilisation. In order to cater to increasing demand and improve profitability, the company has improved product mix in favour of blended cement (PPC), which enjoys better margins. The PPC to OPC ratio improved from 44:56 in FY03 to 87:13 in FY08. With that, the company's capacity utilisation rate has also improved from 96% in FY03 to almost 112% in FY07.
What do numbers say?
Cost control measures: Prism Cement's topline has grown at CAGR of almost 17% during the period FY03 to FY08, which was driven more by cement demand within the region. The company's initiative to improve technology in order to improve capacity utilisation and improve product mix has resulted in cost savings, which in turn has translated into better margins. Cement being a fixed cost intensive industry, improving capacity utilisation helps achieve economies of scale. Further, the company has switched over to grid power in FY06 instead captive power (DG sets based on diesel). The reason behind the same seems to be the rising input costs. The move to depend on grid power to manufacture cement has worked in favour of the company. The cost of power that reported CAGR of 15% during FY03 to FY06, witnessed marginal fall in FY07 on a cost per tonne basis. Further, the company caters mainly to the markets of Eastern UP, North Eastern MP and Western Bihar, which are within the radius of 360 kms of its plant at Satna, MP. The lower lead distance and strong marketing & distribution network of over 2,000 dealers serviced from 46 stocking points (without any wholesalers) enables the company to cater to its customer's needs on a timely basis. The well established distribution network enables the company to contain its rising freight costs. Further, the company has enough limestone reserves to meet its current and future requirements. The total operating cost of the company has grown at a CAGR of 10% since FY03.
The company's move to achieve economies of scale and improve margins by improving product mix and cost control measures has resulted in operating profits growing at a CAGR of almost 45% over the past 5 years. However, one must also note that while the company was able to contain rising costs, the current growth in earnings is also backed by improved realizations that reported a CAGR of 7% during the period FY03 to FY08. However, the tide has turned and the all time high realisations have receded resulting into strained margins in FY08 as compared to FY07 (EBITDA margins down to 38% in FY08 from 43% in FY07). Still they are at par with other cement majors due to cost control measures.
Improved balance sheet: Though the company reported nearly 17% EBITDA margins in FY04, it was bleeding at the net as it was engaged in servicing the initial plant set up costs and working capital requirements. Post FY04, with the demand inching closer to supply, realisations improved. With the improved cash flows, the company undertook a debt reduction programme and is now a zero debt company (in FY03 D/E ratio was 3 times). All this enabled the company to increase shareholder value as the return on net worth (RONW) improved to 47% in FY07 (from -20% in FY03). While growth was a factor of improved realisations that have started witnessing pressure as planned capacities started coming on stream, one must also note that the company has been able to improve its physical performance.
Expansion plans: The company had not expanded its capacity in the past. However, with demand inching closer to supply, the industry had expected supply shortage problems and started building up capacities. Post FY04, improved realisations on account of demand surpassing supply has resulted in improved cash flows. The surplus cash is being deployed to expand capacity to cater to increasing demand for the commodity with increased focus on infrastructural activity. The company following the industry trend has outlined capacity expansion plans to take its total capacity to 10 MTPA by FY11 in two tranches. The move apart from scaling up capacity will also derisk its revenues. The company has been allotted a coal block in Chindwara District of MP, which will commence operations by early 2011. While the company has not indicated the sources of funds required to expand capacity, the same could be met with a judicious mix of debt and internal accruals. The improved cash balance and zero debt leave headroom to leverage its balance sheet to fund expansion plans.
What to expect?
At the current price of Rs 33, the stock is trading at a price to earnings multiple of 4.1 times its trailing twelve-month earnings. We expect the company to grow in line with the industry on account of housing and infrastructural activity picking up pace in the region in which the company is present. However, the upcoming planned capacities have started pressuring margins. For the industry, the fresh capacities announced till date will add up 60 to 70 MT to the existing capacity (190 MT), and are expected to go on stream by FY10. As the capacities become operational (this has started taking place) and utilization levels increase, supply may once again outstrip demand putting downward pressure on margins. Thus, it would be wise to exercise caution as risks outweigh rewards.
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