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Cement: A 'co-operative' effort

Nov 26, 2001

If one were to look at the valuations of cement companies on the bourses, in the last one year, almost all the cement companies have witnessed atleast a 25%-30% rise in market capitalisation. And the action is not over as yet, so it seems. Here we analyse the consolidated second quarter performance of five cement companies viz. ACC, Gujarat Ambuja, L&T, Grasim and Madras Cement.

(Rs m) 2QFY01 2QFY02 Change
Sales 39,285 40,915 4.1%
Other Income 1,129 1,347 19.3%
Expenditure 34,082 35,261 3.5%
Operating Profit (EBDIT) 5,204 5,655 8.7%
Operating Profit Margin (%) 13.2% 13.8%  
Interest 2,535 2,165 -14.6%
Depreciation 2,167 2,266 4.6%
Profit before Tax 1,631 2,571 57.7%
Extra-ordinary items (265) (775)  
Tax 63 358 468.6%
Profit after Tax/(Loss) 1,303 1,438 10.3%
Net profit margin (%) 3.3% 3.5%  
No. of Shares (m) 667.9 667.9  
Diluted Earnings per share* 7.8 8.6  

These five companies together account for over 50% of cement capacity in India and therefore an evaluation of these companies is definetely indicative of the sectoral trend. However, one also has to remember that companies like Grasim and L&T have diversified businesses. Due to a sluggish economy, these businesses suffered and consequently lowered sales as well as profit growth.

Key statistics…
(% change) Sales Operating profit Net profit
ACC 6.3% 56.0% NA
Madras Cements 18.2% -38.8% -95.0%
Grasim 1.3% -3.1% -61.9%
Gujarat Ambuja 19.0% 24.3% 78.6%
L&T 2.0% 15.0% 223.9%

While turnover (consolidated) increased by 4%, companies like Gujarat Ambuja surprised the market by reporting a 19% growth in sales. However, much of this growth was led by higher cement prices. Average realisation for the first half of the current financial year for L&T increased by 18.3% to Rs 1,357 per tonne. This has also resulted in a notable rise in operating profits for the cement majors. A significant fall in operating profits for Madras Cements was due to a 15% rise in raw material costs and a 35% rise in selling and other expenses. The commissioning of a new plant seems to have resulted in higher expenses during the quarter. Barring Grasim and Madras Cement, most cement companies, overall, have reaped the benefit of higher prices. Cement sales for Ambuja increased by 13.8% while turnover went up by 19.0%.

Comparative valuations…
(Rs) Price EPS* P/E (x)
ACC 160 4.0 40.0
Madras Cements 4,575 49.7 92.1
Grasim 277 13.8 20.1
Gujarat Ambuja 175 13.7 12.8
L&T 206 6.5 31.7
* 2QFY02 annualised EPS

But will the rally continue in the second half? Cement demand is expected to increase by 5%-6% in this period. Buoyant housing industry and the government's road construction project, which reportedly seems to be in full swing, will result in higher cement offtake. However, one is not sure as to whether these companies would be able to raise prices further in 2HFY02 in light of a weak economy. Already cement prices in Mumbai seems to have fallen by Rs 15 per bag. However, if one were to take a long term view, the prospects are heartening.

For one, consolidation would reduce fragmentation and benefit larger players. There are more than 50 cement manufacturers in the Indian market as compared to 4 to 5 companies that dominate the scene in the international markets. Besides, as the government progressively increases tax concessions for the housing sector, cement companies tend to benefit on account of higher consumption. Also, infrastructure in India is still in its nascent stage. For the first time in recent years, the government has taken road construction project seriously and such productive investments augurs well not only for the cement industry but for the economy as well. The proposed road connectivity project is expected to increase cement demand at a CAGR of 8% for the next seven years. So all these factors point towards a favorable demand scenario in the long run.

On the valuations front, on a comparative basis, Gujarat Ambuja seems to be the cheapest of the lot despite the fact that it is one of the most efficient manufacturers in the country. But valuation could have suffered on account of huge debt, which was raised to fund the ACC stake acquisition last year. ACC is purely a turnaround story and the turnaround, if recent quarterly results are any indication, is quite acute and the company is back in the black. Though L&T is the clear market leader in the EPC business, the cement demerger plans are not clear and consequently has resulted in high volatility.

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