Recovery hopes for India Cements

While better cement realisations and demerger of IPL business are positives, demand revival is key

Expectations of better demand, along with price increases, has helped the stocks of cement companies in the South outperform through the past six months. India Cements has gained on bourses, touching a 52-week high of Rs 134.3 on September 22.

The creation of Telangana has led to increased expectations of an improvement in demand. As cement prices have been rising, producers are estimated to see better realisations, as well as profitability.

The recent announcement by India Cements to demerge its Indian Premier League (IPL) franchisee, Chennai Super Kings (CSK), into a wholly-owned subsidiary is being looked at with optimism. While the move is in line with the company's plan to focus on its core cement business, and is thus being viewed positively, some analysts believe the company might also be looking at monetising the CSK investment to reduce debt.

  Earlier, the company had indicated it planned to reduce debt through monetisation of non-core assets. Nirmal Bang’s Giriraj Daga said as of June-end, gross debt stood at Rs 3,375 crore, with a debt/equity ratio of one but the debt/earnings before interest, tax, depreciation and amortisation ratio had been alarming, at 6.5. Daga believes monetisation of the IPL business could happen at a substantially higher value compared to his conservative estimate of Rs 140 crore. Given CSK's remaining tenure of three years and recent deals, analysts believe buyers will be willing to pay in multiples of this value. For an estimate of the impact on India Cements’ earnings, they are awaiting details. During September, cement prices in Hyderabad stood at Rs 310/50-kg bag, compared with Rs 260 in the year-ago period. In Chennai and Bangalore, the prices stood at Rs 325 and Rs 385 a bag, compared with Rs 250 and Rs 280, respectively, a year ago. This is likely to prove beneficial for all cement players, including India Cements, which is estimated to record good earnings from the September quarter.

Though expectations of demand recovering are strong, the Street will carefully watch the actual recovery, given most of the company's manufacturing facilities are located in regions with excess cement capacities. The ability of companies to hold prices is crucial for an improvement in profitability. Overall, analysts remain positive on the company's prospects. The consensus target price of Rs 132, according to 12 analysts polled by Bloomberg, indicates an upside of 22 per cent to the current Rs 108.25.