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S. Vaidya Nathan

Stacked up with layers of debt.

INVESTORS with a penchant for high risk can consider small exposures in the India Cements' stock as there may be gains from further restructuring. Investors who had picked up the stock at about Rs 17 — levels at which Business Line had reversed its long-standing `sell' view to `buy' — or lower levels can contemplate booking profits partially as the stock is up at least 50 per cent.As for the much-needed restructuring, the debt part is a done deal. But the possibility of options such as strategic partners being explored to shore up the equity cannot be ruled out.

The production capacity of close to 6 million tonnes — even after the proposed sale of two units — is bound to be attractive for MNCs looking to enter the Indian market.

There are no concrete plans as yet in this regard. But if India Cements is to come out of its debt-related troubles, moves towards equity restructuring appear inevitable.The performance in the January-March quarter only reinforces the need for additional support to cut down the debt burden. Cement prices were significantly higher in this quarter compared to the other months of 2002-03. Yet, India Cements ended the quarter with losses of Rs 89 crore. Its cash profits slipped into the negative territory. This is the state of affairs in a quarter when its counterparts in the southern market — Madras Cements and Dalmia Cement — have turned in impressive performances riding on high cement prices.

The splash of red has come about despite the check on costs, which have declined significantly.Quarter-on-quarter, this has helped India Cements move into the black at the operating level. But its profitability levels have slumped sharply compared to its own position two years ago or of its counterparts in the most recent quarter.

In 2000 and 2001, India Cements managed to avoid slipping into the red despite its high interest costs. But in those two years, its operating profit margins were about 23 per cent. Subsequently, the operating margins slipped by more than 10 percentage points. A combination of lower cement prices and capacity utilisation hit the bottomline hard. Producers have cut back on the latter to avoid on prices due to existing excess supply. India Cements produced about five million tonnes in each of the last two years — leaving close to 40 per cent of its capacity unutilised.

The unkind cut came in the shape of narrowing gap between revenues and expenditure. In the last three years, while revenues declined by about Rs 231 crore, expenses rose by Rs 83 crore. The combined effect of this divergent, but negative trend, and the 50 per cent rise in interest costs left it with losses of Rs 307 crore in 2002-03.

But if the trends in the January-March quarter continue, there may be an improvement in the sense that losses could come down substantially. This is also likely since the debt-restructuring package is yet to take full effect and may do so over the next quarter or two. Even with the debt restructuring, India Cements has a long way to go before it can return to profits.

It would also need the benefit of cement prices staying at higher levels consistently unlike in the last three years. This assumes importance as debt levels may not shrink significantly even after the proposed sale of Raasi Cement and Visakha Cement. India Cements may still have to contend with a debt burden of about Rs 1200 crore. The long-term trouble spot will be the ballooning of interest burden. But this is at least five years away — adequate breathing space to become more shipshape.

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