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India Cements: Hit by rising costs - Views on News from Equitymaster
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India Cements: Hit by rising costs
Aug 11, 2009

Performance summary
  • Revenues grow by 9.6% YoY during 1QFY10 mainly on account of improved realisations.
  • Operating margins contract by 5% as costs grow at a faster pace as compared to topline.
  • Profit before tax declines by 17.4% YoY on the back of lower operating profits and higher interest costs and depreciation charges.
  • However, net profits grow marginally by 1.5% YoY. This is on account of extraordinary items during both the periods under consideration. On excluding the same, net profits decline by 24.8% YoY.
  • India Cements, through its subsidiary, ICL Financial Services, recently acquires a 53% stake in a Rajasthan based Indo Zinc Company, which was implementing a project for setting up a cement plant in Rajasthan.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 8,763 9,603 9.6%
Expenditure 5,651 6,671 18.1%
Operating profit (EBITDA) 3,112 2,931 -5.8%
EBITDA margin (%) 35.5% 30.5%  
Other income 1 - -100.0%
Interest 230 385 67.2%
Depreciation 490 571 16.4%
Profit before tax/(loss) 2,392 1,976 -17.4%
Extraordinary item (218) 210  
Tax 754 743 -1.4%
Net profit 1,421 1,443 1.5%
Net margin (%) 16.2% 15.0%  
No of shares (m) 281.9 282.4  
Diluted EPS (Rs)*   15.4  
P/E (times)   9.0  
*trailing twelve month earnings

What has driven performance in 1QFY10?
  • India Cements witnessed a 9.6% YoY growth in topline during 1QFY10 on account of firm prices of the commodity. The company witnessed 1.7% YoY growth in cement production volumes and 1.1% YoY growth in cement volume sales. Growth in volumes was poor during the quarter on account of restrictions in power availability from the grid more particularly in Andhra Pradesh and also on account of unscheduled stoppage of one of the cement mills at Vishnupuram. The dispatches were also affected by non-availability of trucks during the election times and non-availability of wagons.

  • Operating profits declined by 5.8% YoY during the period under consideration as costs grew at a faster pace as compared to the topline. The cost of operations went up by 18.1% YoY during 1QFY10 mainly on account of higher power and employee costs. The power generation cost increased during the quarter on account of power restrictions and non-availability of power from https://www.equitymaster.com/detail.asp?date=5/13/2009&story=1. Employee costs were higher on account of increase in salaries and wages as per industry for the managerial staff along with increase in wages of employees as per the cost of living index. The profitability of the company was also impacted owing to dry docking of vessels. All of this resulted in 5% contraction in EBITDA margins.

  • Profit before tax declined by 17.4% YoY on the back of lower operating profits and higher interest costs and depreciation charges. However, net profits reported marginal growth of 1.5% YoY. This was on account of foreign exchange difference that resulted in extraordinary income during the quarter, while there was extraordinary expenditure incurred during the same quarter last year. Thus excluding the impact of the extraordinary items during both the periods under consideration, net profits declined by 24.8% YoY.

  • India Cements, through its subsidiary, ICL Financial Services, recently acquired a 53% stake in a Rajasthan based Indo Zinc Company, which was implementing a project for setting up a cement plant in Rajasthan. Upon finding difficulties in going ahead with its proposed greenfield expansion of 1.5 million tonnes (MT) in the state of Rajasthan, India Cements proposed expanding its capacity in Rajasthan through the acquisition route. Along with the 1.5 MT cement plant, the company had also announced a 20 MW captive power plant within the state. For this project, Indian Cements has outlined capex of Rs 6 bn. The plant is expected to commence operations by FY11.

What to expect?
The industry is likely to maintain its growth momentum and continue growing volumes at around 8% to 9% in the medium to long term. The upcoming planned capacities are however, likely to exert pressure on the realisations, impacting margins. While the near to medium term growth prospects of the Indian cement industry have been impacted, the long term growth story remains intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run.

At the current price of Rs 138, the stock is trading at a fair valuation of over Rs 3,700 on the enterprise value per tonne (EV/tonne) basis as per FY09 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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