Cement sales: Firming up

With anlaysts predicting a rise in prices after monsoon, cement stocks have picked up in the last three months.

The top four cement companies "" ACC, UltraTech, Gujarat Ambuja and Grasim Industries "" reported a 4 per cent y-o-y growth in despatches that touched 56.1 lakh tonnes in June 2007. This was helped by the spurt in construction activity prior to the beginning of the monsoon season.

Meanwhile, in the quarter ended June 2007, these top four players also grew their despatches by 4.7 per cent y-o-y to 176.07 lakh tonnes.

Analysts point out that these large players are operating close to their full capacity and thus have a limited ability to grow despatches aggressively in the peak demand season. In the March 2007 quarter, these four players had grown their dispatches by 6.9 per cent y-o-y to 183.6 lakh tonnes.

The large cement players' price realisations in the March 2007 quarter ranged between Rs 2,900 and Rs 3,300 per tonne and analysts expect a slight improvement in the June 2007 quarter on a sequential basis, given the higher prices in the southern markets.

Cement companies had largely refrained from hiking prices in key markets like west and north in the last quarter, given the well documented pressure from the central government through the dual duty structure. Input costs for cement are understood to have been relatively stable on a y-o-y basis in the last quarter.

However, it does appear that the cement companies do have some leeway to raise prices and analysts point out that it could be possible after the monsoon.

As a result, investor sentiment for this sector has shown signs of improving "" Grasim has gained 35 per cent over the past three months compared with a 16 per cent rise in the Sensex. Gujarat Ambuja too had risen 23.5 per cent.

Going forward, cement demand is expected to be slack in the September 2008 quarter, given the traditional reduction in construction activity during the monsoon. ACC trades at 16 times estimated CY07 earnings, while Grasim is trading at 12 times estimated FY08 earnings.

Himatsingka Seide: Stitch in time

Indian companies have been quite active in making acquisitions in the US and the UK over the past year-and-a-half. The logic is simple-India is a low cost manufacturer of textiles and by buying distribution abroad, domestic companies can move up the value chain.

Himatsingka Seide, a manufacturer of decorative home textiles as well as bridal and fashion wear, has made its second acquisition in 2007 by buying 80 per cent stake in Divatex Home Fashions, USA. With the enterprise value estimated at $75 million, Himatsingka will pay $53 million for its stake.

In terms of valuation, the pricing appears reasonable-at about 0.5 times revenues and 5.4 times operating profit, considering that Divatex is among the top three distributors of bed linen in the US.

In its earlier acquisition of Giuseppe Bellora, Italy, Himatsingka acquired 60 per cent of the existing company at an EV/sales of 0.67 times and invested ¤3.75 million for an additional 10 per cent stake. Bellora has presence in exclusive stores, departmental stores and multi-brand outlets in Europe.

With distribution in Europe and the US under its belt through these two acquisitions, Himatsingka will be able to scale up going forward with its Rs 400-crore greenfield bed linen plant expected to begin commercial production this month.

Funding these two acquisitions will also not be a problem as the company has raised $60 million through a GDR issue.

In FY07, Himatsingka had net revenues of Rs 174 crore on a standalone basis. In FY07, its operating margin declined 830 basis points to 24.5 per cent as raw material costs, personnel costs, and selling, administrative and other expenses increased.

However, with increased capacities and ready demand, things should improve going forward. The CY06 revenues for Bellora and Divatex work out to over Rs 600 crore based on Himatsingka's stake in the two companies.

This would mean that Himatsingka's consolidated top line will rise substantially. The Himatsingka Seide stock has lost money over the past six months, and trades at about 20 times consolidated FY07 earnings. Profits and earnings should grow as benefits from the acquisitions come through.