India Cements: Hold

Shareholders of India Cements can hold the stock. Continuing strong demand, healthy despatches and the moderation in input prices point to an improving earnings picture for the company in the coming quarters.

Also, as new capacities in the Southern region take time to flag off, the region (South) is unlikely to see a surplus supply situation in the near term. The company’s new plant in Rajasthan, which will commence operations in 2010, will also help the company tap the high-potential western market.

With the stock (Rs 102) trading at six times the trailing earnings per share, the market appears to have already factored in the possible negatives (of reduced demand and cost pressures). The enterprise value per tonne too is down significantly from Rs 6,423 per tonne in June 2008 to Rs 4063 per tonne now.
Demand still strong

India Cements caters predominantly to the southern markets and the demand growth in this region has been quite strong, even amid the slowdown over the past two quarters.

The last quarter saw an average 10 per cent growth in demand Y-o-Y in this region. New capacities coming up in the region are being postponed and cement offtake from the infrastructure-projects in Andhra Pradesh and Tamil Nadu continues to remain strong. This suggests that the demand outlook for the coming few quarters, at least, is positive.

India Cements, however, could not completely cash in on the growth in demand over the past quarter due to stoppage of work at two of its plants — Vishnupuram and Dalvoi — due to rains and maintenance work. India Cement’s despatches were lower by two lakh tonnes or 8.3 per cent for the quarter compared to the previous year.

With the plants likely to run at full capacity from the current quarter, volume growth will normalise from here on.
Prices hold high

The southern market is where cement prices have managed to hold up since last year. Even as prices in the South rule at Rs 260 per bag since January 2008, all other regions have seen over a Rs 5-10 per bag drop in prices.

Strong prices in the region have helped the company manage margins to some extent. In West (Gujarat), a one kg bag is sold at Rs 220.
Expansion

In the last quarter, the company commenced operation of its new one-million tonne grinding capacity in Chennai. The capacity up-gradation in units at Malkapur, Andhra Pradesh (1.2 million tonne) and Parli, Maharashtra (1 million tonne) are in progress.

The company’s 1.5-million tonne capacity coming up in Rajasthan, also promises to widen India Cements’ addressable market. The proximity of this location to Gujarat, where several new infrastructure initiatives are taking shape, is an advantage. The West is set to emerge as a region of high demand potential for cement companies in the coming quarters.

As far as the capex plans are concerned, the company has spent Rs 350 crore of the budgeted Rs 500 crore in the Rajasthan facility.

With the remaining capex to be spent in the next two months (February-March 2009), the company expects the plant to commence production in March 2010. The two-million tonne capacity planned in Himachal Pradesh has been deferred for now due to economic slowdown. This decision may actually stand the company in good stead, given that the picture about the longevity of the current slowdown and the cement market remains clouded as of now.

If this project is pursued, the company will be spending Rs 400 crore on the project in FY-10 and Rs 200 crore each in FY-11 and FY-12 respectively.
Cost pressures to subside

India Cements saw its net sales rising by just 2 per cent in the last quarter on extended plant shutdowns. New additions to the capacity have seen depreciation too rising in the last quarter (depreciation cost higher by 65 per cent). Net profits dipped 51 per cent to Rs 61.91 crore in the last quarter. High power and fuel costs have been weighing on the company’s profit for the last few quarters and contributed to a sharp shrinkage in margins in the December quarter.

The December quarter saw the company’s power and fuel cost rising 33 per cent Y-o-Y. But these costs are set to subside with the correction in international coal and crude prices.

Imported coal prices have corrected from $195 in July last year to around $90 now. India Cements imports nearly 75 per cent of its coal requirements and the drop in coal prices can, thus, be expected to substantially ease margin pressures for the company.