Stock Review: India Cements

 

India Cements, a leading player in the southern region, has benefitted from production discipline of companies operating in the region and resulting strong prices. During the year ended March 2011, cement dispatches in the South grew barely 1.1 per cent y-o-y, substantially lower than the all-India growth.

This has boosted cement realisations in the company's key markets like Chennai to 260-265 per bag levels, a jump of 6% since beginning of calendar year. This would help to partially offset the difficult operating environment for southern cement companies due to a rapid expansion in cement capacity in the last few years. In monsoon season, however, cement prices typically weaken.

Also, recent hikes in fuel costs would push up operating costs. In addition, there is uncertainty in demand from key user industries like housing due to rising interest rates.

BUSINESS

The company's installed cement capacity at the end of March 2010 was 14.05 million tonnes. Its key markets are Tamil Nadu and Andhra Pradesh, coupled with a presence in western region. The company has also recently brought on stream its facility in the North.

Cement production in the South was estimated at 62 million tonnes at the end of FY 11, but consumption was only 56 million tonnes. It is not clear if the current strength in cement prices in the South will hold. Apart from this, the company participates in IPL via its Chennai Super Kings team. It also has vessels involved in coastal shipping. The turnover of these two activities is less than 10% of its net sales.

FINANCIALS

The difficult operating environment in the South was reflected in India Cements' performance. Its standalone net sales grew at a compounded growth (CAGR) of 4.4% to 3509.3 crore from FY08 to FY 11, but operating profit fell 7 % during this period. However, in March 2011 quarter, the company reported an improved performance due to better realisations.

OPPORTUNITIES & CONCERNS

India Cements' subsidiary brought on stream a facility with a capacity of 1.5 million tonnes in Rajasthan during October 2010. This would help it diversify beyond the South. But, rising input costs remain a concern.

VALUATIONS

At 72.5 per share, India Cements trades at a P/E of 32.7 times on a trailing four-quarter basis. Madras Cements trades at 9.2 times, while North-based Shree Cement trades at 28.6 times. With limited upside potential in India Cements in short term, investors could instead consider Madras Cement.