 "N Srinivasan's troubles are far from over")
Despite Narayanaswami Srinivasan regaining his position as President, Board of control for Cricket in India (BCCI), challenges for him are far from over off-field. His flagship company India Cement, that has significant presence in South India has seen its market capital erode significantly. In fact, the company has seen its market cap shaved off to one-third of what it was in June'09. Also, ever since the controversy related to Indian Premier League erupted in May, 2013 the fall has been sharp 40% .
Although the larger part of the stock price corrections can be attributed to weak cement demand environment that has persisted in South India for Long impacting company's profitability, the controversy related to Indian Premier League too has had some impact on the investor sentiments.
Although the larger part of the stock price corrections can be attributed to weak cement demand environment that has persisted in South India for Long impacting company's profitability, the controversy related to Indian Premier League too has had some impact on the investor sentiments.
Amongst the South Indian states, Andhra Pradesh sees maximum impact on cement demand and in turn pricing.The lower spending on infrastructure by the government and the political issues like the Telangana Issues have taken their toll on cement demand. The cement capacities are now in surplus compared to demand that leads to softness in Cement prices and in turn impacts company’s realisations.
India cement that has major capacities in Andhra Pradesh has thereby been impacted significantly compared to peers like Madras Cement, which has more capacities in Tamil Nadu.
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The company’s operational performance though is not comparable to larger peers as Ultratech and ACC having all India presence, nor to Shree Cement or Ambuja Cement that are predominantly North India players, It is comparable to performance of Madras Cement or to smaller players as Orient Cement.
N Srinivasan, vice chairman, India Cements said the company is engaged in an "unending" battle on the cost front, especially coal, freight and fuel it is focused on improving efficiency and keeping the variable cost under control. Earlier the company said In Andhra Pradesh power holiday is for 12 days in a month and in the remaining days four hours power cut, this has pushed up the power cost and production cost drastically.
The company has invested around Rs 500-600 crore in setting up captive power plants of 50 mw each in TN and AP. It has created capacity to generate 160 to 170 mw of power, which will meet 80% of its requirements. A company official said going forward impact of this (the integration) will be seen in the EBIDTA. For instance having captive coal mine will result in around $5-10 per tonne. From the two power plants, the company expects around Rs 70 crore benefit from these plants.
Srinivasan said said when it comes to cost and other operational parameters, the company is on par with other plants in Tamil Nadu. Its debt: equity ratio is also less.
However, considering Tamil Nadu is a lucrative market, it is able to sell 50% of the cement produced by Tamil Nadu plants are being sold in Tamil Nadu and Kerala. Whereas, other companies in Tamil Nadu are selling 73-75% of their production in the markets. This makes difference in margins realised by companies.
On the controversies, he said “we are not disturbed by the controversies, since our fundamentals are strong and we did not get distracted also. Infact we re-focussed better.” Earlier, while admitting that perception and valuations were taken a hit, for which he blamed “adverse campaign” by the Media on the spot-fixing issue, Srinivsan said these are just a “temporary” phenomenon and ICL don't see any negative impact on the future. “Our focus is on how to increase our capacity utilisation
If one was to look at the company’s June’13 quarter’s performance, the company sees lowest EBITDA (Earnings before Interest Tax depreciation and Amortization) per ton compared to peers, even comes lower than small cap player as Orient Cement. Madras cement on the other hand definitely sees better profitability because of its better higher capacities in Tamil Nadu. (see Table).
The company’s profits further are getting impacted due to loans in foreign currency.
The company reported Mark to Market losses of Rs 27 crore in June’13 quarter. Thus adverse rupee movement remains a cause of concern.
As per Analysts Company’s IPL revenues have not grown as estimated though profitability has improved. While Analysts as Motilal Oswal estimated Rs 130 crore revenues from IPL during June’13 quarter, the actual revenues came at Rs 110 crore lower than Rs 120 crore in June’12 quarter. However EBIDTA of Rs 32 Crore was better than Rs 21 crore earned in the year ago quarter.
The concern as per analysts also remains on the corporate governance in terms of Capital allocation. While Ravi Sodah at Elara capital points out towards the same, V Srinavasan at Angel broking expects company’s return ratios to remain subdued due to substantial investments in subsidiaries ( loans with zero% interest). He says that at the current market price, though the stock is trading at a low valuation of EV/tonne of $50 however there are no triggers for upside and thus he remains Neutral on the stock.
The ray of hope for company’s performance to improve remains the sustenance of price hikes in September. South India has seen sharpest price hike due to suspected pricing discipline among firms feels Sodah. Prices per 50kg bag in Chennai, Hyderabad, Kochi and Bangalore have increased by Rs60, Rs60, Rs 30 and Rs 25, respectively. Also the company may get some respite on power costs in second half of Fy14 with the captive power plants stabilizing.