Stock review: India Cements

Glut in the southern market has been a drag, but valuation of the IPL franchise could be a positive

The positive sentiment in the stock of India Cements emerges not from its cement business but from the fact that it owns the Indian Premier League (IPL) franchise of Chennai Super Kings. The franchise is expected to be valued around $1 billion.

The company's cement operations remained depressed in the June quarter due to the onset of monsoon. Moreover, poor demand and excess capacity in the southern markets put a lid on prices. India Cements sells around 90 per cent of its production in these markets, where prices have declined the most (by Rs 20-25 per bag over the past two months). Even though average realisations remained steady at around Rs 3,321 a tonne, they remained prohibitive, reckoned analysts. Revenues rose nine per cent year-on-year to Rs 880 crore, but net earnings were down 35 per cent to Rs 36.5 crore. The operating profit fell 21 per cent to Rs 100 crore.

The South India cement market will continue to face some pricing pressure, as it remains fragmented. Top five players account for less than 50 per cent market share in the region, as compared to 70-80 per cent in other parts of the country, point analysts. Almost 40 million tonnes a year capacity was added in FY10, half of which came from South India. To add to the woes, the region saw a drop in consumption by around three per cent on a year-todate basis in the current finanacial year.

Now, only the IPL franchise could save the day with decent valuations, but there is little clarity on these numbers. Analysts have been wary of making an estimate. If one just takes the cement business in consideration, the company is valued at around $70 per tonne, a 40 per cent discount to its replacement cost, say analysts at ICICI Direct. This does not leave much scope for any price appreciation. However, clarity on Chennai Super Kings numbers could provide an upside.