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India Cements posts lower-than-estimated numbers

LiveMint logoLiveMint 26-05-2014 Ravi Krishnan

India Cements Ltd’s March quarter didn’t hold any big surprises. South India-based cement makers were anyway expected to have a bad quarter. In the case of India Cements, the sales and profits numbers came in lower than Street estimates.

The reasons are apparent enough. Demand has been falling in south India owing to a variety of factors such as the elections and the Telangana agitation in Andhra Pradesh. In India Cements’ case, volumes fell by 10.8% from a year ago to 2.46 million tonnes (mt). Moreover, prices have also not been holding up in recent times. Thus, realizations were up a measly 1.6% from a year ago.

These volumes imply that India Cements’ capacity utilization is around 64% (on an annual basis). The lack of economies of scale also hit its operating earnings numbers. Operating profit fell 55.8% to `74 crore while operating margins dropped by 7.2 percentage points to 6.87%.

The outlook for India Cements depends on demand recovering in the South. The consensus in the Street is that demand should look up in the south not only because of the new government focusing on infrastructure but things improving in the Andhra region as the new state of Telangana is carved out on 2 June. Demand from Andhra Pradesh, which hovered around 25mt per year in fiscal 2009, has fallen to 15mt now.

However, the recovery in Andhra demand will alone not be enough. South India suffers from huge overcapacity of cement makers. Nearly 43% of cement capacity additions between fiscal 2010 and 2013 took place in the south.

With capacity utilization at South Indian cement makers averaging around 64%, a steady 12% growth is needed over the next three years for the excess capacity to be soaked up to an extent. That is anybody’s bet for now.

With the recent run-up in cyclical stocks, the share price of India Cements, too, has done well beating larger peers such as ACC Ltd and Ambuja Cements Ltd since the beginning of this year. Its future medium-term earnings are nothing much to write home about; it is trading at 22.6 times one-year forward earnings. However, in terms of enterprise value (EV) per tonne, valuations look attractive at $65.32 per tonne, compared with around $100 for some of its peers.

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