Given the problems plaguing the cement sector and its poor third quarter performance, India Cements Ltd’s tapping $65 million (around Rs296 crore) at Rs120.20 per share through a qualified institutional placement (QIP) may be a mark of investor confidence.
But it will bring in a 9% equity dilution, which would impact its earnings at a time when the cement market does not hold promise.
However, it appears that the company has raised funds largely to prepare for redemption of the $75 million foreign currency convertible bonds (FCCBs) due in May 2011. Given the conversion price of Rs350 a share, it is unlikely that investors may convert debentures to equity. Neither does the company seem inclined to reset the conversion price. Hence, the FCCB redemption and the committed yield to investors would see an outflow of around Rs500 crore at that time.
Graphic: Yogesh Kumar/Mint
Its debt-to-equity ratio of around 0.6 is not too worrisome at this juncture. The firm’s loan outstanding is around Rs2,300 crore, inclusive of the Rs350 crore FCCBs and a Rs600 crore interest-free sales tax loan. But the company also needs funds to expand capacity. Predominantly a south India-based firm, India Cements is building a factory in Rajasthan. It has also planned two thermal power plants of 50MW each, besides intending to acquire a coal mine in Indonesia—all this amounting to a capital expenditure of Rs1,500 crore spread over the next two years.
For now, there seems to be little reason for optimism. For the three months ended 31 December, the company reported a net profit of around Rs35 crore, 43% lower than a year ago and 75% lower than the preceding quarter. This was due to the drop in operating profit margin to 15% of net sales from 25% in the year-ago period.
Further, although cement makers had increased prices since January, one has to see how the recent 2% rise in excise duty and increase in freight costs will affect prices, demand and profit margins.
Analysts are unanimous in their opinion that the southern market will see surplus supply until fiscal 2012, which means low realizations and profitability. Hence, an equity addition of around Rs25 crore (25 million shares) to the existing equity capital of Rs283 crore is quite untimely. India Cements shares dropped 5% in Mumbai on Tuesday to close at the QIP price of around Rs120 each.
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