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India Cements: Top up, bottom down - Views on News from Equitymaster
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India Cements: Top up, bottom down
Aug 6, 2008

Performance summary
  • Topline grows by 17% YoY in 1QFY09 on the back of firm realisations and reasonable growth in volumes.
  • Costs exceed growth in net sales. The same results in 1.2% contraction in EBITDA margins during 1QFY09.
  • Net profits fall by nearly 23% YoY, mainly on account of extraordinary expenses (forex losses), higher depreciation and tax outgo.
  • Excluding extraordinary items, the fall in net profits is lower at 6% YoY. This is despite more than 13-fold growth in other income.


Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 8,316 9,737 17.1%
Expenditure 5,673 6,756 19.1%
Operating profit (EBITDA) 2,643 2,981 12.8%
EBITDA margin (%) 31.8% 30.6%  
Other income 10 132 1255.7%
Interest 314 230 -26.7%
Depreciation 275 490 78.3%
Profit before tax/(loss) 2,064 2,392 15.9%
Tax 317 754 137.4%
Extraordinary items (88) 218  
Net profit 1834 1421 -22.5%
Net margin (%) 22.1% 14.6%  
No of shares (m) 260 282  
Diluted EPS (Rs)*   21.2  
P/E (times)   7.8  
*trailing twelve month earnings

What has driven performance in 1QFY09?
  • The company reported 17% YoY growth in topline during 1QFY09 on the back of higher realisations and decent growth in volumes. While the domestic cement industry has witnessed 8% YoY growth, the southern region witnessed faster growth rate of 12% YoY. The company reported merely 3% YoY growth in volumes as the company is operating at optimum capacity utilisation levels (106% capacity utilisation during 1QFY09) and there is little or no scope left to cater to increasing demand for the commodity till the planned capacities become operational.

    Cost break-up
    (% of sales) 1QFY08 1QFY09
    Consumption of raw material 9.2% 8.6%
    Staff cost 3.8% 4.6%
    Power and fuel 18.1% 20.3%
    Other expenditure 8.5% 9.2%
    Transportation and handling 28.5% 26.6%

  • During 1QFY09, costs grew at a faster pace as compared to the topline resulting in 1.2% contraction in EBITDA margins. The cost of operations increased on account of increase in staff costs and fuel prices. On a cost per tonne basis, the overall cost of operation was up by 15% YoY, which is higher than the general inflation level witnessed within the economy during the quarter under review. Apart from the general price hike, steep rise in fuel prices resulted in substantial growth in power and fuel costs and firming up of freight rates. The company is dependant on imported coal for its operations. The cost of this key raw material and its transportation cost have both moved northwards. Further, the increase in petroleum products also pushed up the packing material cost (increase in polymer prices). Despite all this, the 13% YoY growth in operating profits came in on account of the company’s move to increase the share of blended cement that enabled the company to translate the increase in turnover into profits and optimum usage of low cost power.

  • The steep 23% YoY fall in net profits is the result of extraordinary expenses (forex translation difference) reported during 1QFY09. During the same period last year the company had witnessed extraordinary gains. The forex translation difference has been accounted for outstanding foreign currency convertible bonds. Excluding the impact of extraordinary items, the decline in net profits stood at 6% YoY. This is on account of higher depreciation charges and tax outgo.

What to expect?
At the current price of Rs 166, the stock is trading at an expensive valuation of over US$ 100 (over Rs 4,000) on the enterprise value per tonne (EV/tonne) basis as per FY08UA 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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