India Cements: Cementing gains

Strong demand conditions are expected to help India Cements get better price realisations

The well-known upturn in the cement industry cycle has helped India Cements report a substantially improved performance.

The company's consolidated operating profit (excluding other income) has grown 90.3 per cent y-o-y to Rs 255.85 crore in FY06, as compared to a 32.45 per cent growth in adjusted net sales to Rs 1543.83 crore.

Also, the company's operating profit margins have grown 500 basis points y-o-y to 16.5 per cent in FY06. The stock has, however, dropped about 19 per cent over the past four months compared with 11.5 per cent fall in the Sensex.

Operating profit has grown faster than sales in FY06, thanks to price realisations improving by about 10-12 per cent on a y-o-y basis, say analysts.

In addition, analysts say the company has been focusing on bringing down the cost of power per tonne of cement production by installing captive facilities.

This has helped India Cements in offsetting higher transportation costs, owing to the ban on overloading of trucks. Cement production was pegged at nearly 75 lakh tonne in FY06 compared with 54.9 lakh tonne a year earlier.

The company had been in debt to the hilt and it has been using funds raised from overseas to bring down its debt. It is understood that the company's long term loans at the end of FY06 amounted to Rs 1,400 crore compared with secured loans of Rs 1845.28 crore a year earlier.

Meanwhile, in the March 2006 quarter, operating profit margin has grown 714 basis points y-o-y to 18 per cent.

Earlier, players such as ACC, which have an all-India presence, had seen their operating profit margin grow by 885 basis points to 23.73 per cent in the March 2006 quarter.

Strong demand conditions are expected to help the company get better price realisations. The street appears to have factored the growth performance for the company, as the stock trades at about 12 times estimated FY07 earnings.

IndusInd Bank: Resource crunch

For IndusInd Bank, FY06 was quite difficult. Top line growth was not as much as other banks as its deposit growth as well as advances growth were muted at 14.43 per cent and 3.45 per cent respectively.

As a result, net interest income declined 24 per cent y-o-y in FY06, as total interest income went up only 4.75 per cent.

What the bank has done in FY06 is tilt the balance of retail credit, including vehicle finance, as a percentage of total credit, which has doubled to 52 per cent in FY06 over previous year.

Vehicle finance, which came into its fold owing to the Ashok Leyland Finance merger, grew by 131.5 per cent y-o-y in FY06, and accounted for over 40 per cent of the total loan book.

Corporate credit declined 34.4 per cent in FY06. The bank, which had a problem of NPAs in the past, saw net NPAs go down by 62 basis points to 2.09 per cent.

IndusInd had converted Ashok Leyland Finance branches into bank branches, and also followed a strategy to increase branches, which have gone up from 115 y-o-y to 137 branches at the end of FY06.

Despite that, the bank is still grappling with low-cost deposits (current and savings accounts), which at 12.87 per cent, are not enough.

With its net interest income affected, net interest margins went down 97 basis points to 1.91 per cent. IndusInd's cost of deposit went up almost 50 basis points, and yield on advances declined as the bank discontinued securitisation of receivables, which reduced interest income.

Operating profit (before provisioning) fell 44 per cent y-o-y to Rs 224.6 crore in FY06. According to the management, lower NIM, a reduction of Rs 60 crore y-o-y in securitisation profit and a Rs 45 crore reduction in sale of investments and higher operating expenses on account of branch expansion were the main reasons for the decline in operating profit.

Going forward, the bank is continuing its branch expansions, and expects to increase the contribution of low cost deposits.

The income that it earned from securitisation will now come on its books as advances and improve interest income. Along with higher interest on yields, spreads are expected to improve.

The IndusInd stock has more than halved in the past year, and is available at 1.2 times FY06 book value.