Set For Better Times
23 Jun 13

With general elections round the corner, there will be greater demand for cement from government projects.

The stock of India Cements has taken a severe beating in recent times (down over 30 per cent since mid-May). This follows the alleged involvement of Gurunath Meiyappan, son-in-law of India Cements’ Managing Director, N. Srinivasan, in betting in the recent season of the India Premier League (IPL). However, we believe the concerns may be overdone.

Even in the worst case scenario of cancellation of its IPL franchise, India Cements will be set back by around Rs 140 crore in revenue and Rs 40 crore in operating profit — this accounts for around 3-4 per cent of the company’s sales and profit.

At the current price of Rs 60, the stock discounts its estimated earnings for FY-14 by 7 times, at a significant discount to peers. The enterprise value of the stock is $75/tonne, a 46 per cent discount to the replacement cost.

In FY-13, India Cements reported a nine per cent increase in sales but its net profit declined 44 per cent. Flat realisations along with a sharp rise in input costs did the damage.

This year, however, is expected to be better, given that cement prices have recovered. Also, there should be cost savings on the company’s new captive power plant in Andhra Pradesh, its largest market.

With early signs of demand revival in its other major market of Tamil Nadu, India Cements may step up sales in and around its grinding units in the State. This will help it save on overall logistics costs.

Demand to revive

In FY-13, India Cements sold 100.55 lakh tonnes of cement, up 5.5 per cent over the previous year. The growth was almost in line with the sector growth of six per cent. Demand growth for the cement sector in FY-14 is likely to be better (around 7-8 per cent).

The countdown to the general elections should see a pick-up in government infrastructure spend. Our enquiries with dealers suggest that demand has already picked up in Andhra Pradesh, and price in this market has gone up Rs 60-70/cement bag in the last two months to around Rs 280 levels.

In Tamil Nadu too, the price is up Rs 10-15 to Rs 340/bag. Cement off-take this year should also improve if the higher outlays for the road and infrastructure sectors announced in the Budget materialise. For instance, the amount of Rs 6,000 crore allocated for the rural housing fund may improve cement demand in rural India.

In the January-March 2013 quarter, India Cements saw its plants running at a capacity utilisation of close to 70 per cent. This leaves room for increasing production to meet growing demand.

Improving cost efficiency

India Cements’ input costs rose significantly in FY-13 and its operating margin was down three percentage points to 18.6 per cent. Higher logistics cost (up 27 per cent) due to rise in railway freight, and increase in power cost (up 15 per cent) proved a drag, even as there was not much increase in realisation. Coal prices were down compared to a year ago but the rupee’s fall shaved off much of the potential gains.

Also, with power shutdowns in Andhra Pradesh, India Cements ended up buying power from the open market in the January-March period at around Rs7-8/unit — almost Rs 4/unit higher compared with cost of power purchased from the grid. But cost pressures should abate this year.

A 45 MW captive power plant has been set up by the company in Vishnupuram, Andhra Pradesh. With this, India Cements’ total captive power capacity in the State will increase to 70 MW, and increase its access to power at economical rates.

India Cements has full power backup for its cement units in Tamil Nadu (around 6 million tonnes) . The cost of captive power production works to Rs 4/unit, much cheaper than the Rs 6-8/ unit when bought from the open market.

The company is also expecting to receive some 2-3 lakh tonnes of coal from its mine in Indonesia this year. This should translate to savings of around $10-15 per tonne of coal. India Cements currently imports over 60 per cent (5.5 lakh tonne) of its coal requirements.

As of FY-13, the company had a total debt of around Rs 2,500 crore and its debt-to-equity ratio stood at 0.7 times. Its borrowings have risen over the last two years on capital expenses to set up captive power plants, the full benefits of which should accrue in the coming years. India Cements is mulling to exit some of its non-core businesses. This should free up cash and improve returns for shareholders. Besides cement, the company currently has interests in infrastructure, finance, chemicals, sugar and the IPL.

The hearing on the appeal of cement companies on the cartelisation charges filed against them by the Competition Commission of India is due for hearing in August. Market observers feel that it will be difficult to prove the charges.

In June last year, the competition watchdog accused 11 players in the industry, including India Cements (fine of Rs 187.48 crore), of forming a cartel and directed them to pay 50 per cent of profits of FY-10 and FY-11 as penalty. Cement companies have challenged this order at the Competition Appellate Tribunal.

Concerns over IPL are overdone. The stock appears a value buy at the current price.

Why Buy Beaten down valuation Increase in cement price Demand likely to improve Captive power plant to help save cost

(This article was published in the Business Line print edition dated June 23, 2013)

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