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India Cements: All about realisations - Views on News from Equitymaster
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India Cements: All about realisations
Nov 12, 2007

Performance summary
  • Topline grows by 47% YoY in 2QFY08, led by improved realisations as volume growth is lacklustre.
  • Higher realisations, cost controls aid expansion in operating margins – from 33.4% in 2QFY07 to 40.4% in 2QFY08. Power, fuel and raw material costs lower as percentage of sales.

  • PAT growth of almost 90% YoY- aided by robust growth at operating level and lower interest costs.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 5,164 7,612 47.4% 10,016 14,624 46.0%
Expenditure 3,438 4,539 32.0% 6,635 8,908 34.3%
Operating profit (EBITDA) 1,726 3,074 78.1% 3,381 5,717 69.1%
EBITDA margin (%) 33.4% 40.4%   33.8% 39.1%  
Other income 8 59 606.0% 63 156 149.0%
Interest 364 283 -22.4% 753 597 -20.8%
Depreciation 193 303 57.4% 385 578 50.3%
Profit before tax/(loss) 1,177 2,546 116.3% 2,306 4,698 103.7%
Tax 4 320   7 637  
Net profit 1173 2227 89.8% 2299 4061 76.6%
Net margin (%) 22.7% 29.2%   23.0% 27.8%  
No of shares (m)         260.4  
Diluted EPS (Rs)*         28.6  
P/E (times)         9.1  
*trailing twelve month earnings

Half yearly results are not comparable with previous year because of merger of Visaka Cement Ltd (VCL), with effect from 1st July 2006.

What is the company's business?
India Cements is based in South India and has an installed capacity of about 9 m tones per annum (MTPA). The company enjoys approximately 20% market share and is the largest producer of cement in the South and a leading exporter of the commodity. The company has access to huge limestone resources and plans to expand capacity by de-bottlenecking and optimisation of existing plants as well as by acquisitions. It has 7 plants out of which 3 are in Tamil Nadu and 4 in Andhra Pradesh. The company caters to all major markets in South India and Maharashtra. Its product portfolio comprises of Ordinary Portland Cement (OPC) and Pozzolona Portland Cement (PPC) in the ratio of 53% and 47%.

What has driven performance in 2QFY08?
It’s all about realisations: The buoyancy in cement demand continued during 1HFY08 with the all-India cement consumption reporting almost 11% YoY growth. In line with the industry, the Southern region has also reported almost robust demand clocking 10% YoY growth in 1HFY08. India Cements, being one of the major players, has also benefited on account of healthy demand and has continued to uphold the prices. Though in 2QFY08, the company’s physical performance was not enthusing. Thus, the current topline growth of 47% YoY in 2QFY08 and 46% YoY in 1HFY08 was more led by improved realisations, which grew by almost 22% YoY during the first half.

Contains overall operating costs: Though costs continue to scale up, the company has clocked 78% YoY growth in 2QFY08 and 69% YoY growth in 1HFY08 owing to firm prices. The substantial increase in the cost of key input materials such as coal and gypsum and wages of employees through long-term wage agreement and increase in salaries of management staff has led to 41% YoY growth in operating cost during 2QFY08 and almost 28% YoY in 1HFY08.

However, the company has been making few strides to control costs such as setting captive power plants, utilising low cost gas based power, which has contained increase in cost. The company has reduced power consumption per tonne of cement (reduced by 3 units) and has availed power from low cost power sources. Though Indian Cements is taking efforts to curtail costs, it further needs to tighten cost control measures as it is dependent on coal imports for its operation (70%) and the landed cost of the same has been heading northwards. In the future too, the coal linkage or availability of coal will remain a concern. During the period under review, the rise in input cost was mitigated to some extent by reducing consumption of units. However, the 7% expansion in margins was achieved on account of improved realisations. Also the increase in the proportion of blended cement (current blending ratio is 69%) has enabled the company to translate the increase in turnover into profits.

Cost break-up (% of Sales) 2QFY07 2QFY08 1HFY07 1HFY08
Consumption of raw material 9.4% 7.8% 9.1% 9.3%
Staff cost 4.9% 7.0% 4.7% 5.8%
Power and fuel 24.8% 21.8% 24.8% 21.6%
Other expenditure 11.9% 9.9% 12.1% 10.0%
Transportation and handling 15.6% 13.1% 15.6% 14.1%

Top to bottom: In 2QFY08, India Cements’ net margins have expanded in line with the EBITDA margins. Even if one excludes other income, which has witnessed seven-fold growth, the net profits growth stands at 86% YoY instead of 90% YoY. Though the tax outgo has increased, it has been on account of increase in fringe benefit tax and provision for deferred tax apart from increase in revenues. Though, during the period under review, interest costs were lower, deprecation charges have gone up considerably on account of capacity expansion programme undertaken by the company.

What to expect?
At the current price of Rs 261, the stock is trading at an expensive valuation of US$ 200 on the enterprise value per tonne (EV/tonne) basis as per FY07 numbers. While the benefits of restructuring have duly kicked in, it must be borne in mind that the realisations are at all time highs. Though, the southern region is expected to witness demand growth in line with industry growth rate and as per announcements till date the huge chunk of capacities are coming in northern and eastern region, geographical diversification is a useful strategy for a commodity business like cement. Once the lined up capacities come on stream as per schedule, the industry is expected to face excess supply situation. Any decline in realisations will affect company adversely as the current growth is more led by improved sales realisations rather than volumes and efficiency. Thus, while the medium term scenario is favourable, from a long-term standpoint risks outweigh rewards.

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