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India Cements: Impacted by falling profits - Views on News from Equitymaster
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India Cements: Impacted by falling profits
Nov 5, 2008

Performance summary
  • Topline grows by 22% YoY in 2QFY09 led by firm realisations and growth in volumes.
  • Cost pressures dent operating profits by nearly 6% YoY.
  • The fall in net profits is higher at 40% YoY as a result of extraordinary expenses (forex losses), higher depreciation charges and tax outgo.


Financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 8,902 10,875 22.2% 17,218 20,637 19.9%
Expenditure 5,829 7,974 36.8% 11,502 14,730 28.1%
Operating profit (EBITDA) 3,074 2,901 -5.6% 5,717 5,907 3.3%
EBITDA margin (%) 34.5% 26.7%   33.2% 28.6%  
Other income 11 91 708.9% 21 198 841.0%
Interest 283 248 -12.2% 597 478 -19.8%
Depreciation 303 498 64.1% 578 988 70.9%
Profit before tax/(loss) 2,499 2,246 -10.1% 4,563 4,638 1.7%
Extraordinary item 47 (296)   135 (513)  
Tax 320 608 90.0% 637 1,361 113.6%
Net profit 2,227 1,343 -39.7% 4,061 2,764 -31.9%
Net margin (%) 25.0% 12.3%   23.6% 13.4%  
No of shares (m)       260.4 281.9  
Diluted EPS (Rs)*         18.0  
P/E (times)         5.2  
*trailing twelve month earnings

What has driven performance in 2QFY09?
  • During 2QFY09, India Cements witnessed 22% YoY growth in topline backed by firm realisations and higher volumes. The company has benefited from the favourable demand scenario witnessed in the southern region. Cement production was higher by 4% YoY during 2QFY09, while despatches reported nearly 7% YoY growth. Here one must note that, the current growth is led more by realisations than volumes. With upcoming capacities the current high realisations are likely to reverse in the medium term.

    Cost break-up
    (% of Sales) 2QFY08 2QFY09 1HFY08 1HFY09
    Consumption of raw material 6.7% 9.9% 7.9% 9.3%
    Staff cost 6.0% 3.8% 5.0% 4.2%
    Power and fuel 18.6% 20.8% 18.4% 20.5%
    Other expenditure 23.0% 27.1% 23.6% 25.2%
    Transportation and handling 11.2% 11.7% 12.0% 12.1%

  • The rising cost of operation has led to fall in operating profits by nearly 6% YoY during 2QFY09. The cost of operation increased substantially on account of unprecedented growth in prices of the key input material namely coal. The company is dependant on imported coal for its operations and the weakening rupee had aggravated cost pressures. The increased cost of fuel led to increase in transportation and packaging costs (increase in polymer prices).

  • Falling operating profits, extraordinary expenses (forex translation difference), higher depreciation charges, and tax outgo led to 40% YoY fall in net profits. The depreciation charges are on the higher side on account of capital investment that not only includes expansion of capacity but expenditure on shipping and IPL Cricket Franchise. 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 25% YoY.

What to expect?
At the current price of Rs 94, 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 FY08 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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