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India Cements: Logistic costs play spoilsport - Views on News from Equitymaster

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India Cements: Logistic costs play spoilsport
Aug 2, 2010

India Cements announced its 1QFY11 results recently. Both top line and bottom line registered a de-growth of 8% YoY and 83% YoY respectively. Here is our analysis of results.

Performance summary
  • Top line declines 8% YoY in 1QFY11.
  • Operating margins fall drastically to 11.6% in 1Q FY11 due to increase in transportation and handling cost as a percentage of sales. Transportation cost (as a percentage of sales) increased from 14% in 1QFY10 to 21% in 1QFY11.
  • Dismal performance at the operating level dragged the bottom line as well. Net profits declined 83% YoY in 1QFY11.


Financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Sales 9,535 8,807 -7.6%
Other operating income 68 21 -69.0%
Total Income 9,603 8,828 -8.1%
Expenditure 6,671 7,806 17.0%
Operating profit (EBDITA) 2,931 1,022 -65.1%
Operating profit margin (%) 30.5% 11.6%  
Other income - 264  
Interest 385 298 -22.7%
Depreciation 571 599 4.9%
Profit before tax 1,976 389 -80.3%
Exceptional items 210 (116)  
Tax 743 24 -96.8%
Profit after tax/(loss) 1,443 249.8 -82.7%
Net profit margin (%) 15.0% 2.8%  
No. of shares (m)   307.2  
Diluted earnings per share (Rs)   0.8  
P/E ratio (x) *   14.1  
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • Topline declined 8% YoY during the quarter despite increase in clinker and cement volumes during the quarter. Drop in realizations due to excess capacity more than offset the volume growth thereby impacting the topline during the quarter. Management does not anticipate the pricing scenario to improve in the near term. Hence prices are likely to remain soft in Southern India. However, in the view of significant additional capacity coming on stream, the company plans to increase its exposure to other states in Southern India namely Tamil Nadu and Karnataka.

  • Operating profits declined 65% YoY due to increase in overall expenditure. The operational cost of the company went up on the account of increase in power & fuel and transportation cost. Power & fuel cost (as a percentage of sales) increased from 25% in 1QFY10 to 31% during the quarter due to increase in coal prices, a key raw material input. Transportation cost (as a percentage of sales) increased from 14% in 1QFY10 to 21% in 1QFY11 due to shortage in availability of wagons. This impacted operating margins for the quarter.

  • Net profits declined 83% YoY to Rs 250 m. Net margins fell substantially from 15% in 1QFY10 to 2.8% in 1QFY11 due to dismal performance at the operating level coupled with an increase in depreciation expenses.

What to expect?
Cement prices in southern India are likely to remain sluggish due to over capacity. The situation is unlikely to improve in the near term. In view of over capacity, cement players are looking to export the produce to north eastern states where prices are higher. However, this is likely to impact margins (visible in this quarter) as freight expenses would rise.

At the current price of Rs 103, the stock is trading at 14 its trailing twelve month earnings. The stock as such looks attractively priced. However, concerns do prevail. The rising costs coupled with expected softening of realizations will arrest growth in the medium term.

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