India Cements: Hold/Sell on uptrend

Recommendation: Hold/Sell on uptrend

S. Vaidya Nathan

THOUGH the earnings card of India Cements has not presented a good picture, existing shareholders can stay invested for the present and use any price uptrend to cut exposures in the stock.

From the medium- to long-term perspective, though the company has the capacities to figure as a major player, concerns remain about its profitability and the stress of financial costs.

India Cements' performance in the second quarter of fiscal 2000-01 points to the underlying weakness in the cement market and the price being paid by the firm for expensive acquisitions. In a quarter that saw a distinct firming up of prices, the company reported lower sales compared to the corresponding quarter the previous year.

And more surprisingly, the sales levels in the July-September quarter were lower than the April-June quarter, in which the prices were at much lower levels. The numbers clearly suggest that volumes have been on the lower side. This may be a combination of two factors -- lower demand levels and scaling down of production in certain markets as part of supply side management by producers.

For instance, this quarter saw cement prices in Hyderabad touch highs of around Rs 145 a 50-kg bag when, at the best of times, prices have not crossed the Rs 120-mark. The trend is clearly driven by supply side management rather than any spurt in demand.

The sales at Rs 337.44 crore (Rs 349.72 crore in the April-September quarter 1999) declined by around 3.6 per cent. Despite expenses being under some control -- this trend could be positive if sustained -- the operating profits at Rs 80.81 crore (Rs 90.45 crore) have declined 11.9 per cent, pointing to the spreading of costs over smaller volumes.

The reported interest burden continues to be high at Rs 43.92 crore (Rs 47.42 crore) and may end up matching the 1999-2000 levels of Rs 170.41 crore in the current fiscal as well. This high interest burden, coupled with a decline in operating profit margins by close to two percentage points, has hit the shareholder's earnings stream hard.

With depreciation charges also rising by 10 per cent to Rs 18.81 crore, the company ended the July-September quarter with a 39 per cent decline in profits. At Rs 19.53 crore, the earnings per share on an equity base of Rs 138.39 crore works out to Rs 1.41 for the quarter. Cash profits too have declined and this is a cause for concern in the light of the company's heavy debt burden.

For the first six months of fiscal 2000-01, sales are at Rs 727.19 crore (Rs 710.45 crore), operating profits at Rs 151.92 crore (Rs 160.44 crore) and post-tax earnings at Rs 34.62 crore (Rs 25.20 crore). The combined effect of sluggish volumes and lower prices has led to a decline in the operating profit margin from 22.58 per cent to 20.89 per cent.

For this period, the post-tax earnings are lower by around 27.2 per cent. But compared to 1999-2000 as a whole (when there was a marked deterioration in profitability in the last two quarters), the operating profit margins managed so far are higher by a percentage point. Given the overall industry environment, this points to some belt-tightening by the company.

Outlook: Cement prices continue to show firm trends and are at higher levels in the South compared to other regions. But volume growth has been unimpressive. Given the trends in the economy this may not change soon enough or in a sustainable manner, though the January-March 2001 quarter may be better if government-spending picks up. There is a question over the cuts imposed on expenditure.

The price levels in Tamil Nadu and Andhra Pradesh may not be of a sustainable nature and the risk of a price decline looms as a more distinct possibility. The high price paid for the acquisition of Raasi Cements appears to be weighing on the earnings card, and given the absence of growth in cash flows, this picture is unlikely to change.

This could also place the company at a disadvantage in its efforts to pursue growth. With new units likely in 2000-01, supply-side pressures may act as a dampening influence on prices unless there is strict supply-side management. On balance, the outlook does not look bright from a medium-term perspective. Existing shareholders can stay invested for the present and use any price rally to cut exposures in the stock.

Pic.: Mr N. Srinivasan, Managing Director, India Cements.