N Srinivasan returns to off-field battle, at India Cements

With earnings taking a beating, vice-chairman says flagship firm battling costs

The Supreme Court's go-ahead to his presidentship of the Board of Control for Cricket in India (BCCI) gives N Srinivasan more time to attend to another of his problems, an off-field one.

India Cements, his flagship company with a significant presence in South India, has seen its market capital erode by a third since June 2009. In the quarter ended June 2013, it saw the lowest Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne compared to peers. Lower, even, than small-cap entities such as Orient Cement (see table).

Profits got impacted further due to loans in foreign currency. It reported mark to market losses (writing down the worth of assets to reflect current values) of Rs 27 crore in the June quarter.

A part of the problem is the manufacturing location. India Cements has major capacities in Andhra Pradesh, which has seen a huge impact on cement demand and in turn pricing, due to lower spending on infrastructure by the state government and political issues such as Telangana.

The operational performance is not comparable with larger peers such as UltraTech and ACC, which have an all-India presence. Or with Shree Cement or Ambuja Cement, predominantly North India players

Srinivasan, vice-chairman of India Cements, said the company was engaged in an "unending" battle on the cost front. Especially on coal, freight and fuel; it was focused, he said, on improving of efficiency and keeping variable costs in control. In Andhra Pradesh, there is a power holiday for 12 days in a month; each of the other days has a four-hour stoppage in supply. This has substantially pushed up power and production costs.

The company has invested Rs 500-600 crore in setting up captive power plants of 50 Mw each in Tamil Nadu and Andhra. It has created capacity to generate 160-170 Mw, meeting 80 per cent of its requirement. A company official said the impact will be seen in the Ebitda. From the two power plants, the company expects around Rs 70 crore benefit.

Srinivasan said when it came to cost and other operational parameters, the company was at par with plants in Tamil Nadu. Its debt to equity ratio is also less.

India Cements is able to sell 50 per cent of the cement produced by its Tamil Nadu plants in the state and in Kerala. In comparison, other companies in Tamil Nadu are selling 73-75 per cent of their production in the markets. This leads to a difference in margins.

Srinivasan said the controversies relating to cricket did not distract his attention on the company. "In fact, we re-focused better. Our focus is on how to increase our capacity utilisation."

Analysts say India Cements' revenues from the Indian Premier League cricket tournament have not grown as estimated, though profitability has improved. While analysts as Motilal Oswal estimated Rs 130 crore revenue from the IPL during the June quarter, the actual revenue was Rs 110 crore, lower than the Rs 120 crore in the June 2012 quarter. However, the Rs 32 crore of Ebitda was better than the Rs 21 crore in the year-ago quarter.

V Srinivasan at Angel Broking expects the company's return ratios to remain subdued due to substantial investments in subsidiaries (loans with zero per cent interest). He says at the current market price, though the stock is trading at a low enterprise value to tonne of $50 (Rs 3,060), there are no triggers for an upside and, thus, he remains neutral on the stock.

The hope for the company's performance remains the sustenance of September's price increases.

South India saw the sharpest - the price of a 50-kg bag rose in Chennai, Hyderabad, Kochi and Bangalore by Rs 60, Rs 60, Rs 30 and Rs 25, respectively. Also the company might get some respite on power costs in the second half of FY14, with its captive power plants stabilising.