Lower costs boost India Cements' Q2

Decline in coal and diesel costs helps the company post better-than-expected profits

India Cements’ performance for the quarter ended September 2015 was driven largely by lower operational costs. While higher cement prices in south India also helped, the demand uptick still remains a concern. With demand in south Indian states, especially Andhra Pradesh and Telangana, remaining subdued, volumes at 2.16 million tonnes (mt) declined 8.5 per cent year-on-year (y-o-y). Thus, net sales at Rs 1,079 crore declined 4.6 per cent y-o-y and were marginally lower than Bloomberg consensus estimates of Rs 1,085 crore.

It is the decline in imported coal prices and lower diesel costs that led to lower power and fuel as well as transportation and handling costs for India Cements. Thus, the company’s overall costs fell 11 per cent, and boosted its operating performance. Earnings before interest, taxes, depreciation and amortisation (Ebitda) at Rs 232 crore came much better than the Rs 192 crore estimated by the Street. For a company with high debt, the declining interest rates also proved positive. With interest costs down 13 per cent to Rs 95 crore, the net profit at Rs 41 crore grew more than five-folds over the September 2014 quarter’s Rs 7.5 crore and came 21 per cent higher than estimates of Rs 34 crore.

Following the strong operating performance and profits, India Cements’ stock gained 5.3 per cent on Monday to Rs 83.60. The company had hived off its franchise of Indian Premier League and, hence, the figures of current quarter are not strictly comparable with last year’s. Nevertheless, hiving off of non-core businesses is positive for the company as its performance will now be driven by fundamentals of the cement business.

Going ahead, the firm’s prospects hinge on the revival of cement demand in south India. While on an all-India basis, cement demand had seen a two per cent growth, south India saw a five per cent fall. The capacity utilisations for south India-based cement players also remain lower at about 60 per cent compared to 74 per cent in the rest of India. Cement prices in the south are being managed mainly by production discipline. Not surprisingly, analysts such as those at Nomura say that continuing pricing discipline among the southern players is critical to maintain profitability.

The good part is that analysts see some recovery in cement demand in south India from the March 2016 quarter. The new capital of Andhra Pradesh, Amaravati, which is to be developed, and other infrastructure improvement in Telangana are seen as drivers of this demand. In this backdrop and in light of the good September 2015 quarter performance, Shrenik Gujarathi at Angel Broking has a target price of Rs 112 for India Cements.

There are, however, others such as Nomura that have a much lower target price of Rs 88. They say fundamentally, they do not like the company’s high exposure to south India given the region’s oversupply. Their bottom-up analysis suggests cement demand from infrastructure projects (roads, railways and other key segments) will be skewed towards non-south regions. Also, India Cements has the highest operating cost among peers, making it vulnerable to falls in realisation.

While Nomura has a ‘neutral’ rating on the stock, the Bloomberg consensus target price is Rs 111, indicating a 33 per cent upside from current levels.