India Cements

Investors in the stock of India Cements can consider booking profits at this point and entering the stock at a later date. Oversupply worries in the Southern region and the resultant pressure on prices in this region may curtail the stock's performance relative to the market.

Close to 16 million tonnes of additional cement capacity came up in South India in FY09, most of which has commenced complete commercial operations. A further 7 million tonnes have been added this fiscal which may gradually find its way into the markets.

This has imposed pressure on cement prices in the region, with prices correcting by around Rs 15-20 per bag from year ago levels to Rs 250 now. Andhra Pradesh, where most new capacities are concentrated, has seen higher pressure in recent months with prices cited at Rs 170/bag. Volume growth, though showing signs of improvement, may not be sufficient to completely offset the weakness in prices.

At Rs 123, the stock is trading at 8 times its trailing one year earnings. Other players in the South are trading at a valuation of six-seven times.

Pressure on prices

In 2008, when cement prices were flat in the entire northern region, the southern pocket saw an over Rs 20/bag increase to Rs 270/bag levels. This was at a significant premium to the rest of the country (all India average price being Rs 247/bag). New players moved into the region and existing players augmented their capacities based on the more remunerative prices and tight supply conditions.

As the new manufacturing facilities have slowly ramped up their output, it has imposed pressure on prices in this region, whittling down the regional premium. In the September month, prices dropped by more than Rs 20/bag and are since then hovering at Rs 250/bag levels. The surplus is also evident from the fact that capacity utilisation rates of cement units in the South had fallen from 80 per cent in the last year to around 65 per cent by November 2009. Prices are expected to be a little subdued in the south for some time to come.

Despatches

In both the June and September quarters, India Cements reported a lower volume growth (4 per cent vs 4.6 per cent and 1.6 per cent vs 3.6 per cent) than the previous year. Demand offtake has been slower in Andhra Pradesh though growth in Tamil Nadu has been steady. This picked up to 30 per cent in the recent months of October and November, but is helped partly by the low base of last year (despatches fell by 8 per cent in the same months last year).

Given this backdrop, India Cements' sales were supported more by realisations than volumes in the past two quarters.

In the half-year ended September'09 the company reported an 8 per cent growth in sales when despatches were only 3 per cent higher. The outlook for the ongoing quarter is uncertain in the light of the disruption in offtake in Andhra Pradesh, where half of the company's capacity is located. Lower demand from this region may also aggravate surpluses in this region.

Capacity additions

India Cements has made attempts to acquire a wider regional presence through new projects. With the commissioning of the 1.2-million-tonne grinding unit in Malkapur, AP, and the 1-million-tonne grinding unit in Parli, Maharashtra, the company's current capacity stands close to 14 million tonnes. While the company has deferred plans on a cement unit in Himachal Pradesh, a 1.5-million tonne plant in Rajasthan is in progress and is up for completion by June.

The unit at Rajasthan may give the company access to the markets in the West. However, this too may not remain a very lucrative market for long. Excess supplies from the South have already started moving to the West, curtailing the scope for higher prices in that region.

The September-ended half-year saw India Cement's net profit (before exceptional items) decline by 12.4 per cent to Rs 406.18 crore even as players such as Shree Cement (PAT doubled) and UltraTech (PAT up 56 per cent) reported a robust growth in profits. Higher depreciation, power and interest charges were a drag on the profit.

The company's depreciation costs have spiked by 16 per cent on new additions to capacity. Interest cost increased by close to 60 per cent to Rs 75.88 crore in this period. The company had recently raised Rs 140 crore through issue of commercial paper at 7.15 per cent.

Power shortage mainly in the state of AP resulted in the company buying power from alternate sources at higher costs. The power and fuel cost were higher by 15 per cent; savings on the fuel front on decline in coal prices didn't help much. India Cements is setting up power plants, one each in Tamil Nadu and Andhra Pradesh, at a cost of Rs 500 crore. It is also in the final stages of acquiring a coal mine in Indonesia.

via BL