India Cements poised for further gains

Rising cement rates and okay to merger of units with parent will lead to better profit growth

The National Company Law Tribunal approving amalgamation of Trinetra Cement and Trishul Concrete Products with India Cements is seen as positive. The union of the two subsidiaries with the parent will not only simplify the structure, but also help India Cements derive benefits from its core business, say analysts who expect the event to lead to a re-rating of the stock, which jumped 8.8 per cent on Thursday.

India Cements, with significant capacities in Andhra Pradesh and Telangana, had taken stake in an abandoned cement plant at Banswara (Rajasthan) and expanded its capacity to 1.5 million tonnes per annum (mtpa). The merger will push up India Cements’ standalone capacity to 15.6 mtpa from 14.1 mtpa, and will add to its regional footprint. Trishul Concrete Products, which offers ready-mix concrete, is a Chennai-based supplier. Both subsidiaries Trinetra Cement and Trishul Concrete Products are held by India Cements through another subsidiary, ICL Financial Services. 

A restructuring will lead to benefits for India Cements, say analysts. The loans of both subsidiaries will get cleared up. This falls under India Cements’ strategy of realigning its business verticals and focusing only on core business, said an analyst with a domestic brokerage. Further, there are expectations of Rs 300-400 crore in tax savings from the merger due to unabsorbed losses. Since India Cements has a yearly tax outgo of Rs 80-100 crore, the total benefits may be realised over three-four years, say analysts.

A larger regional footprint for India Cements also makes its exposure to South less risky. Apart from enabling faster growth and tax benefits, the merger should also lead to debt reduction. The company has already paid Rs 230 crore of its FY17 target of Rs 250 crore. The news flow has seen India Cements stock gain over 18 per cent in two days to Rs 190.

Meanwhile, the Street’s sentiment on India Cements has continued to improve, with rising realisations and expectations of debt reduction in last one year. Hopes of strong demand revival in Telangana and Andhra Pradesh kept sentiment strong. The union news now comes at a time when cement prices in Andhra Pradesh and Telangana have gone up. The price of cement bag (50 kg) in South India, which had declined from Rs 326 before note ban to Rs 282 in March 2017, has now moved up to Rs 317. 

Anand Rathi Research estimates India Cements’ standalone revenues and profit to grow over 19 per cent in March quarter. After pegging earnings growth at 16 per cent in FY17, Motilal Oswal Securities expects India Cements’ profit to rise 70 and 36.5 per cent in FY18 and FY19, respectively. 

The company is trading at replacement cost of close to $90 a tonne, which is at a substantial discount to Ramco Cements ($160). Gap is likely to reduce.