Of all the regions that the Indian cement industry is divided into, the southern region hogged the maximum limelight in FY03, unfortunately for all the wrong reasons. With capacity exceeding demand by estimated 11 million tonnes (MT), cement prices fell by average 14% in FY03 thus affecting profitability of all the players in the region. Against this backdrop, let us throw some light on the performance of two of the major cement companies in the south viz. India cements and Madras cements (who continue to focus on the southern markets).
India cement is the largest producer of cement in the southern region with an estimated capacity of around 9 MT. The company caters to predominantly southern region and some parts of Maharashtra. Madras Cements, on the other hand, has a capacity of nearly 6 MT and caters exclusively to southern markets besides exporting to Sri Lanka (0.4% of unit sales).
A comparative view…
Interest coverage ratio
Sales 3 year CAGR
Net profit margin
*FY02 data for India cements, 1 US$ - Rs 47
FY03 was a lacklustre year for both the companies with both under performing the industry in terms of revenue growth. While India Cements posted a 3% growth in cement volumes, Madras Cements saw a 9% growth in volumes. However, the magnitude of fall in prices was higher in Southern region in FY03 due to influx of capacity. As a result, realisations fell sharply (16% for India cements and 11% for Madras cements). If one were to look at the last three years, Madras Cements has been able to grow in line with industry whereas India Cements’ revenues have dropped at a CAGR of around 15%.
Operating margins of India Cement compares poorly with that of Madras Cement, who is among the most cost efficient players in the industry. Madras Cement has a relative new plant. Secondly, average cost of power, employee and sales are lower for Madras Cements as compared to India Cements. Just to put things in perspective, power cost as a percentage of sales for Madras Cements was 10% whereas the same was 12% for India Cements.
Significantly high interest burden has also played its part in affecting India Cement’s profitability. As is reflected from the table above, interest coverage is at a concerning level of 1.4 times. The company has been supporting most of its acquisitions with debt and it is currently in the process of restructuring its debt. There are no such worries for Madras cements.
In view of the strong financials of Madras cements, it enjoys better valuations than India Cements. As far as the future prospects of both are concerned, India cements can hope of a recovery as its proposed debt restructuring program was approved by the CDR (corporate debt restructuring) cell. Restructuring through sale of some cement plants is also on the cards. On the demand front, we expect the southern region to grow in line with the industry. However, price realisation could continue to remain under pressure as top players have strengthened their presence. Given this backdrop, valuations of Madras Cements also seem to be on the higher end of the spectrum.
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