Concrete future for India Cement

POUND WISE

After a gap of five years India Cements is all set to end the financial year with profit, thanks to higher demand and debt restructuring.

The largest cement company in south India, India Cements with a group capacity of 8.8 million tonnes (MT), has posted strong numbers after a long time. For the first time since FY01, the company is set to make profits for FY06.

Better still, the company's performance is likely to improve further as the cement industry has revived in its key southern markets, on the back of a robust 25 per cent consumption growth during FY06. The reduction in sales tax in January 2006 and efficiency improvement would help growth in earnings.

The company saw a turnaround in its December FY06 quarter results. After a net loss of Rs 33.31 crore in the previous December quarter, the company clocked a net profit of Rs 7.22 crore with its debt restructuring in place. This was on the back of 30 per cent y-o-y growth in net sales to Rs 411.87 crore. 
 

FINANCIALS
India Cements (Rs crore)	FY02	FY03	FY04	FY05	Q3FY06
Sales	1188.00	1027.00	1233.00	1385.00	346.00
Y-o-Y growth (%)	-17.60	-13.60	20.10	12.40	31.80
Ope profit	285.40	138.60	164.10	216.90	50.40
Y-o-Y growth (%)	-12.00	-51.40	18.40	32.20	55.40
OPM %	24.00	13.50	13.30	15.70	14.50
Net profit	-756.00	-201.40	-95.90	4.60	7.20

The good numbers can be attributed to the strong demand growth seen in the southern markets after a lull in FY05, on the back of a good monsoon, increased focus on irrigation and rural road projects.

Analysts feel that with high borrowing costs behind it and its key markets seeing sustained demand growth, the company is set to see good times in the coming two years. India Cements has seen 35 per cent growth in net revenues in the nine months ended December 2005.

The fall of 5.5 per cent in interest costs was due to a reduction in total debt through issuance of $10 million GDS and corporate debt restructuring (CDR)scheme. For the December FY06 quarter, the company's operating profit rose 55 per cent to Rs 46.78 crore. Moreover, the interest cost declined 35 per cent to Rs 29.57 crore.

Apart from the reduced debt burden, analysts feel that another key cost reduction for the company over FY07 would come from a reduction in sales tax.

The estimated benefit for India Cements from the uniform sales tax regime in Tamil Nadu would be in excess of Rs 20 crore, according to a CLSA report. If the state accepts the VAT regime from April 2006, the sales tax rate would further reduce to 12.5 per cent, thus giving further benefits to the company.

Besides, last year, the company was hit by a lower growth rate in the first half of FY05. On the contrary, in the first half of this financial year, cement dispatches in the region saw a double-digit increase year on year. With healthier financials, the management has also approved a hike in the FII investment limit from 24 per cent to 40 per cent of paid-up equity capital.

"Currently, the capacity in south India is about 46 million tonne (MT). While last year (FY05), consumption had dipped to 31 MT, the gap has been bridged by demand growth in FY06. The uniform 14 per cent sales tax now applicable in the southern markets, unlike the dual sales tax in the past, has also helped an already ready-for-take-off scenario. India Cements, thus, clocked 35 per cent growth in sales so far in this financial year. Moreover, nobody is adding much capacity in the south. The current capacity utilisation is nearly 100 per cent in Tamil Nadu, Kerala and Karnataka, while it comes down to about 90 per cent if Andhra is included. Even if demand does not outstrip supply for another year, the existing situation is good enough," said an analyst with HDFC Securities.

India Cements will be the biggest beneficiary of this demand uptake. After all, the company is a market leader in the south with 19 per cent market share. In the three years, FY1997-2000, the company nearly doubled its capacity from from 4.8 MT to 9.8 MT through acquisitions. It acquired Visaka Cement (1.1 MT) and CCI's Yerragutla plant (0.5 MT) in FY98 and then Rasi Cement (2.3 MT) in FY99.

Subsequently, the cement industry in south India underwent a severe downturn owing to excess capacities (12 MT added over FY00-02), and India Cements had to divest its stake in Sri Vishnu cements. The renewed uptrend in demand would now put the additional capacities to good use.

The cement industry, anyway, looks set for robust growth going ahead "� at 8 per cent on an average. Housing, which constitutes 60 per cent of the demand for cement, is a growing segment.

The focus on ports and other infrastructure areas in the southern region would generate a significant portion of the incremental demand. Analysts expect southern cement companies to clock earnings growth of about 20 per cent in the next financial year.

The construction activity in the southern region is broad based according to analysts. It is being driven by major metros like Chennai, Bangalore and Hyderabad, as well as the development activity percolating to tier-2 cities like Mangalore, Kochi, Visakhapatnam and Coimbatore. The increasing focus on Andhra Pradesh Government on irrigation projects the Tamil Nadu Government's focus on rural roads also add to the increasing cement demand.

Now that demand is picking up in its key markets again, along with a reduction in interest burden, India Cements is turning around. But analysts feel it has a long way to go.

As the financial situation has improved for it, India Cements has posted a profit of Rs 7 crore. In comparison, even some smaller companies have turned in better performance, and so have the industry majors, said an analyst at HDFC Securities.

Moreover, analysts point out to possible risks. If the growth in cement prices is lower than expected in the key markets, then there would be an impact on the topline and earnings.

Secondly, the proposed FCCB issue may lead to further diluting of the equity, which in turn would impact the EPS by a similar level. However, the benefits of the new fund raising are expected to outweight any dilution of earnings.

The valuation of India Cements compares well with some of its competitors. Its 12-month trailing P/E stands at 25.70x, while ACC has a P/E of 25.40x and Grasim has 20.95x. While Gujarat Ambuja is cheaper at 9.67x, the stocks with higher valuations are Madras Cement (48.24x) and UltraTech (86.76x).

The EV/EBITDA of India Cements for FY06E stands at 15.5x compared with Madras Cement (14.2x), ACC (16.2x), Grasim (16.5x) and UltraTech (16.6x).