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India Cements: Margins under pressure - Views on News from Equitymaster

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India Cements: Margins under pressure

Nov 10, 2009

Performance summary
  • Revenues grow by 8% YoY and 9% YoY during 2QFY10 and 1HFY10 respectively, restricted by the sluggish demand growth in the southern region.
  • Operating profits grow marginally by 2.6% YoY as costs outpace growth topline.
  • Profit before tax declines by 7% YoY on account of dismal show at the operating level, lower other income and substantial increase in interest cost.
  • Net profits grow by 2% YoY on account of lower foreign exchange translation loss.
  • India Cements, through its subsidiary, ICL Financial Services, has recently acquired 53% stake in a Rajasthan based Indo Zinc Company, which is implementing a project for setting up a cement plant in Rajasthan.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 9,206 9,894 7.5% 17,862 19,429 8.8%
Expenditure 6,305 6,917 9.7% 11,956 13,589 13.7%
Operating profit (EBITDA) 2,901 2,977 2.6% 5,907 5,841 -1.1%
EBITDA margin (%) 31.5% 30.1%   33.1% 30.1%  
Other income 91 55 -39.4% 198 123 -38.0%
Interest 248 374 50.7% 478 759 58.6%
Depreciation 498 572 14.9% 988 1,143 15.7%
Profit before tax/(loss) 2,246 2,086 -7.1% 4,638 4,062 -12.4%
Extraordinary item (296) (13)   (513) 197  
Tax 608 704 15.9% 1,361 1,447 6.3%
Net profit 1,343 1,369 2.0% 2,764 2,812 1.7%
Net margin (%) 14.6% 13.8%   15.5% 14.5%  
No of shares (m)       281.9 282.4  
Diluted EPS (Rs)*         15.5  
P/E (times)         6.8  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • India Cements’ revenues grew by 8% YoY and 9% YoY during 2QFY10 and 1HFY10 respectively, restricted by the sluggish demand growth in the southern region. Andhra Pradesh reported nearly nil growth in demand and witnessed pricing pressure with new capacities coming on stream. The company’s revenues also include income from IPL franchise and freight earnings.

  • Operating profits grew marginally by 2% YoY as costs grew at a faster rate as compared to the topline. The cost of operation increased by nearly 10% YoY during the period under consideration. This is mainly on account of higher cost of raw materials, power and dry docking expenses. Further, increase in royalty on limestone and higher employee costs also pressurized margins. Cost of power generation went up on account of power restrictions and availment of high cost power from alternate sources. All of this led to 1.4% contraction in EBIDTA margins.

  • Profit before tax declined by 7.4% YoY. This was on account of dismal show at the operating level, lower other income and substantial increase in interest cost. However, net profits reported marginal growth of 2% YoY due to lower foreign exchange loss during the quarter.

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. However, the upcoming planned capacities are likely to exert pressure on the realisations, impacting margins. The same has already started taking place. 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 106, the stock is trading at a fair valuation of over Rs 3,600 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 perspective, the rising costs coupled with expected softening of realisations will arrest growth in the medium term.

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