Analysts pick Ramco over India Cements

Demand for cement, realisations unlikely to improve in the near term

The performance of south-based cement companies India Cements and Ramco Cements (earlier Madras Cements) for the September quarter was no different from the larger peers.

While the average price in south for the quarter at Rs 291 a bag (Rs 11 lower than a year ago) was better than the national of Rs 279 a bag (down Rs 21), lower demand and higher costs took a toll on profitability of the companies.

Though the prices have risen in November, analysts say it won't be of much help. Demand is likely to be muted.

The performance of India Cements and Ramco Cements was weak. Ramco's sales at Rs 905 crore declined 8.4 per cent, while India Cements' at Rs 1,084 crore fell 3.4 per cent, against a year ago.

Ramco's operating margin at 13 per cent fell 1,837 basis points year-on-year.

The company's raw material, freight and power and fuel costs rose substantially year-on-year. In comparison, India Cements saw lower operating margins of 11.8 per cent, down 651 basis points.

It posted a loss of Rs 22 crore for the 2013 quarter against a profit of Rs 49 crore a year ago. This was on a 48 per cent rise in finance costs to Rs 99 crore, which included Rs 23.6 crore due to foreign exchange (forex) transaction difference on foreign currency loans. It reported mark-to-market loss of Rs 27 crore.

Even if one were to adjust for the forex transalation difference, the company would have ended in the red. Ramco, on the other hand, reported a profit of Rs 18.3 crore (down 86.3 per cent year-on-year). Profits would have fallen by a higher margin, but for the minimum alternative tax credit of Rs 10.4 crore.

Outlook
Demand and realisations are not expected to show an improvement in the near term, though sector participants expect the second half to be better that the first half of FY14 on rural and retail demand.

In a report on November 18, Ambit Capital's analysts had said, "The near-term outlook remains challenging, as demand recovery is not visible. A prolonged delay may pressure pricing when operating costs are likely to inch up."

"While we factor in a four-five per cent year-on-year volume and realisation growth in the second half for large companies, this could be downgraded if retail demand fails to recover, leading to pricing pressure. We do not expect pricing to recover, given the continuing underutilisation."

Due to the inexpensive valuations, analysts remain positive on Ramco (Rs 162 apiece).

Analysts at Ambit Capital maintain buy (target Rs 200), given inexpensive valuations (6.3x FY15 earnings before interest, taxes, depreciation and amortisation, or Ebitda) for a company with a strong brand in key south markets. Analysts at Anand Rathi, too, maintain a buy (target of Rs 222).

India Cements, however, faces larger challenges, with a higher exposure to Andhra Pradesh. V Srinivasan at Angel Broking expects the return ratios to remain subdued due to substantial investments in subsidiaries (loans with zero per cent interest). He maintains neutral after the second quarter result. Sanjeev Kumar Singh at Centrum Broking adds return on equity is expected to remain subdued at 4.8/6.6 per cent in FY15/FY16.

"Clarity on cost savings from the shipment of coal from Indonesia is yet to emerge after several quarters. The earnings have disappointed significantly and we believe there are still downside risks to earnings even after a significant cut in estimates." India Cements, which is up 22 per cent to Rs 59 in one month versus Ramco's 7 per cent fall, thus, could see some correction.