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India Cements: Prices hold the key

Sep 9, 2003

Poor realisations in the southern markets have affected most players adversely. The worst hit have been those players who have remained focused on the southern markets and have barely expanded their reach. India cements is one such player and in this article we will try to analyse the company's performance in recent times and study its future prospects. India cement is the largest producer of cement in the southern region. The company has a total capacity of 9 m tonnes and it enjoys a 28% market share in the southern region.

*FY02 PAT almost nil

The company's performance in FY03 was dismal. The drastic fall in realisations coupled with high interest burden, took a toll on the company's performance and as a result, the company suffered huge losses of Rs 2 bn. Had it not been for the tax writeback of Rs 1 bn, the company's income statement would have looked even worse. In a year where the industry grew 9%, the company's volume increased by a meager 3%, indicating the intense competition the company is facing in the southern markets.

The company is a good example of how things can go wrong. Sensing the growth potential of the industry, the company decided to go in for mega acquisitions and financed majority of its deals with debt. This proved to be a cardinal mistake for the company because when the prices started falling, the company's topline came under pressure and as a result the company was unable to cope with the high interest burden. If one compares its interest coverage ratio with other cement majors, one can clearly see that it's the lowest among the four. The company at present has a huge debt burden of Rs 18 bn.

However, there seems to be a light at the end of the tunnel for the company. With a view to reduce the finance cost of the company, the CDR (corporate debt restructuring) cell (formed by RBI) has approved a debt-restructuring program for the company and under this program, all debt excluding public deposits will be restructured and also additional working capital will released to the company after proper assessment. This is likely to give the company the much-needed time to set its house in order.

The company is also trying to sell its subsidiaries such as Vishaka cements and Raasi cements so that the amount realised from the sale can be used to reduce debt further. However, given the poor financials of the company and the oversupply situation in the southern markets, the two subsidiaries are likely to get lower valuations than expected.

The company's performance in the 1QFY04 has also been encouraging. It has managed to bring down the loss to Rs 100 m as compared to Rs 500 m in the same period of the previous year.

Although, the company has got an approval for its debt-restructuring program, all its efforts are likely to come to a naught if the prices remain subdued in the medium to long term. Therefore, if the company has to revive its fortunes, prices hold the key. The stock is currently trading at Rs 31. The stock has recovered in the past few months mainly on account of its restructuring program and now with encouraging 1QFY04 results, one could safely say that the company has taken a small step towards its turnaround.

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