Profitability boost for India Cements

Demand, realisations remain muted, but lower fuel costs help company exceed profit estimate

The performance of south-centric cement maker, India Cements, was similar to its peers on the profitability front, which got a boost from lower costs. The demand scenario, however, remains muted. India Cements saw volumes decline sequentially, but rise year-on-year. Also, with realisations under pressure, net sales at Rs 1,203 crore declined 1.5 per cent year-on-year.

Average cement prices in south India at Rs 331 per 50-kg bag were lower than Rs 336 per 50-kg bag in the previous quarter and Rs 363 per 50-kg bag in the year-ago quarter. The 15.3 per cent year-on-year increase in blended sales volumes at 2.4 million tones eased some of the decline in pricing. Hence, net sales came ahead of Bloomberg consensus estimate of Rs 1,093 crore.

Power and fuel costs declined 14 per cent year-on-year and boosted profitability. The company's Ebitda (earnings before interest, tax, depreciation, and amortisation) at Rs 201.4 crore came higher than the estimate of Rs 193.5 crore. This boosted blended Ebitda per tonne to Rs 839.

In addition to a good show at the operating level, 'other income' was also up while interest costs fell 14 per cent year-on-year. Thus, net profit at Rs 44 crore was 19 per cent higher than estimate of Rs 37 crore. With this, the stock also hit its 52-week high of Rs 131 on Thursday before closing at Rs 126.

Moving forward, the improvement in profitability of India Cements depends on improvement in cement demand and realisations. The cost benefits, now accruing due to lower coal prices and increased pet coke usage, are unlikely to sustain forever. Positively, India Cements' capacities in Andhra Pradesh and Telangana may benefit from development in the two new states. Analysts expect cement demand to get a boost from increased spending by the state governments on infrastructure. Also, rural demand may increase after good monsoon.

However, after an 89 per cent run-up in the stock price from February lows, most positives seem priced in. The consensus target price, derived from analysts polled on Bloomberg since June, stands at Rs 126.4, indicating that the upside for the stock is limited. After results, analysts at Religare Institutional Equities say that at the current price, the stock is trading at an enterprise value/Ebitda of 8x FY17 and 7x FY18 estimates and have a 'hold' rating on it.