India Cements, the largest cement producer in the Southern region, has reported huge losses in 1HFY03. On a YoY basis, the company has reported a 23% decline in its topline while net losses have almost quadrupled in 1HFY03. The results for 2QFY03 is even worser, but what is more disturbing is that the company has shown losses at the operating level itself. The operating margin of the company stood at -5% in 2QYF03.
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The fall in topline can be mainly attributed to a drastic fall in cement relisations. While volumes may have been good on account of robust housing and infrastructure demand, realisations have plummeted in this region due to oversupply condition. In FY02, both ACC and Gujarat Ambuja have set up huge capacities in the Southern and Western region respectively. This has led to a glut of cement supply in this region, as the cement output of Gujarat Ambuja's Chandrapur plant may be finding its way in to the southern markets.
What is even more surprising is the fact that Madras Cements, another major player in the South Indian market, has reported better results for the 2QFY03. While Madras Cements reported a 14% fall in topline it is much better on a comparative basis to India Cements. This may be in part explained by the fact that India Cements operates mainly in Tamilnadu and Kerala, where realisations have been significantly lower. The focused presence means that the company has failed to capitalise on the robust growth in cement volumes.
Despite the low interest rate regime, the company has not been able to reduce its interest liabilities. India Cements had borrowed excessively in order to increase its capacity by way of inorganic expansion in the past. As a measure to reduce its high debt obligations, the company has resorted to distress sale of its cement plants. India Cements has already sold its subsidiary, Shri Vishnu Cement, for a sum of Rs 3.9 bn in FY02 to Zuari Cement. It has already floated plans to sell its other cement subsidiaries viz. Visaka Cement and Raasi Cement. As a precautionary measure, the company has proposed a debt restructuring plan to its lenders.
The stock is currently trading at Rs 19. The markets have already punished the stock due to its poor performance in the last quarter (down 50% from Rs 33 since the beginning of this financial year). In the short term, the topline of the company is likely to face increasing pressure due to competition from ACC and Gujarat Ambuja, who have set up new capacities to cater to the Southern markets. On the realisations front, due to its regional presence, the bargaining power is lower and as a result realisation growth seems unlikely. In the long term, the company's performance will depend heavily on whether it is able to develop new markets in other regions of the country. Until then, one will not be surprised if the stock price languishes at the current levels.
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