Concrete reality

Demand boost, dual-tax abolishment to give impetus to southern cement firms

South-based cement stocks are once again showing signs of returning in vogue. That's because cement consumption in the south is estimated to have risen about 20 per cent so far this year.

In addition, sentiment for southern cement stocks has also improved thanks to the recent scrapping of dual sales tax structure in Tamil Nadu, say analysts.

India Cements, one of the largest players in the south with a market share of about 19 per cent, is expected to be one of the key beneficiaries.

This company, which had reported losses (excluding exceptional items) between FY02 and FY05, had also been in debt to the hilt and was also referred to the CDR Cell (Corporate Debt Restructuring).

But with the improvement in the demand situation in FY06, India Cements is expected to make profit. The company has also focussed on strengthening its balance sheet and working capital position because of its CDR and a GDR issue of over $100 million.

The company's earnings before exceptional items and tax amounted to Rs 13.39 crore for the nine months ended December 2005. Also, the company has been attempting to bring down its cost structure through more efficient processes and a reduction in staff.

The steps taken by the company have not gone unnoticed, with the India Cements' stock appreciating 68 per cent to Rs 168 since the beginning of 2006.

Investors are also betting that the scrapping of dual sales tax structure, which would bring down the effective tax rate on cement from about 19 per cent to 14 per cent in Tamil Nadu, would also help to drive consumption in the south, in the medium term.

IIP: Good numbers

If the index of industrial production (IIP) was headed only down after strong numbers for October 2005, the numbers for January 2006 are quite robust. The overall IIP rose 8.3 per cent in January 2006, compared to 6.1 per cent and 5.3 per cent in November and December 2005.

Even compared to the January 2005 growth of 7.5 per cent, the numbers this January are stronger. The manufacturing sector has been the main contributor to the IIP growth with a 9.2 per cent growth. Manufacturing growth had slackened in both November and December 2005, and has turned the corner in January.

The growth in electricity has more than doubled to 5.8 per cent from 2.4 per cent a year ago. The mining sector, which was declining from June has ended up in the positive, although with a small 0.2 per cent growth. The heavyweight segment machinery and equipment other than transport grew at 17.9 per cent.

Basic metals and alloys, non-metallic mineral products, textile products, food products, beverages, tobacco and related products were also big growth segments. By use-based classification, capital goods have grown a whopping 26.3 per cent in January 2006 compared to 8 per cent a year ago.

Except for the 9.8 per cent growth in October 2005, January has been the second best month since the first quarter, which has been the best so far in FY06.

The current year has also been rather erratic with the IIP growth rate reaching a high of 12.2 per cent and falling as low as 4.7 per cent. If the growth rate continues for the next two months, the estimated GDP growth of 8.1 per cent for FY06 may not be too difficult.

KEC International : Lights on

KEC International was listed again on the bourses after a restructuring. According to analysts, the erstwhile KEC International had approximately Rs 350 crore worth of investments and advances in RPG group companies, which are long-term and strategic in nature.

In order to bring greater focus to its operations and unlock value of the investments, KEC International restructured its balance sheet into two separate companies by transferring the power transmission business to KEC Infrastructures, which was later renamed KEC International.

The erstwhile KEC International was renamed KEC Infrastructures, and will be the investment company and foray into the real estate business.

Power transmission player KEC International reported a 182 basis points fall in its operating profit margin to 9.63 per cent in the December 2005 quarter, despite net sales expanding 69.25 per cent to Rs 457.53 crore.

Analysts attribute this fall to exceptionally high margins that the company earned when it executed contracts in Iraq during the previous year, which obviously could not be maintained in the December 2005 quarter.

Like other players in the power equipment sector, the company has also benefited from the current surge in the Indian power capex cycle, with domestic orders accounting for nearly 30 per cent of its order backlog of Rs 2,500 crore at the end of December 2005 quarter.

But its major thrust of exports to countries in the Middle East and Africa continues to yield results. It has recently bagged orders worth Rs 339 crore from Afghanistan and Ethiopia.

For the KEC shareholder, the restructuring has worked out well. Compared to a pre-restructuring stock price of Rs 386 in early February, today the shareholder has a share of KEC International at Rs 422 and a share of KEC Infrastructures at Rs 50 as per Friday's closing.