Ramco Cement, India Cements: Lower demand, high costs take toll

The performance of the two leading south India-based cement players – India Cements and Ramco Cements (earlier known as Madras Cement) – during the quarter was no different from their larger peers.

While the average cement prices in south India during the quarter at Rs 291 a bag (Rs 11 lower than september’12 quarter) were better than the all-India average of Rs 279 a bag (down Rs 21), lower demand and higher costs took a toll on profitability of the companies.

Performance of India Cements that has a higher exposure to the weakest market in south India (Andhra Pradesh) remained under pressure since the state is witnessing sluggish demand growth due to political situation and other issues as those related to Telangana. Comparatively, Ramco that has a higher presence in Tamil Nadu performed better.

Ramco’s operating margin at 13% tanked a massive 1,837 bps (basis points) on year-on-year (y-o-y) mainly led by higher costs as realisation remained weak. The company’s raw material, freight and power and fuel costs rose substantially y-o-y.

In comparison, India Cements saw operating margins of 11.8% (down 651 bps). The Income from operations also included a sum of Rs 6.23 crore pertaining to income (along with associated expenditure) from Champion's league tournament.

In terms of bottom-line, India Cements posted a loss of Rs 22 crore for the September 2013 quarter compared to profit of Rs 49 crore in the previous corresponding period thanks to 48% (y-o-y) rise in finance costs. Ramco, on the other hand, reported a profit of Rs 18.3 crore (down 86.3%) y-o-y. Sales at Rs 905 crore declined 8.4 per cent y-o-y while that of India Cementss at Rs 1,084 crore declined by 3.4 per cent y-o-y.

Outlook

Going ahead, cement demand and realisations are not expected to show an improvement in the immediate near-term, analysts expect the second half to be better that the first half of FY14.

ICICI Securities channel checks dated 29th October indicate that prices in the southern region remained stagnant with all major cities experiencing a hike in price, while the Hyderabad region faced a decline in price due to low demand on the back of regional issues.

On pan-India basis, cement prices stood at Rs 298/bag, higher by only Re 1/bag over previous month. On a y-o-y basis, prices are up by Rs 7/bag. “Prices are expected to remain under pressure in the coming months in the absence of any major improvement in demand,” reports suggest.

 
However, looking at the inexpensive valuations, analysts remain positive on Ramco Cement. Analysts at Ambit capital maintain buy stance given inexpensive valuations (6.3x FY15 EBITDA) for a company with a strong brand in key south India markets. Their target price of Rs 200 implies 7.5x FY15 EBITDA.

Analysts at Anand Rathi have also reiterated a buy rating on the stock with a price target of Rs 222 based on 9x FY15e EV/EBITDA. They add that the stock price factors in the negatives such as the group company donations.
 
India Cements, however, faces larger challenges having higher exposure to Andhra Pradesh which is witnessing demand and pricing pressures due to the political turmoil. 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 maintains his neutral stance on the stock post second quarter result.