India Cements Ltd was the first in its sector to beat consensus estimates, which is commendable because some of its larger peers missed expectations by a large margin. ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd missed estimates by an average 14%, as cost pressures turned out to be much higher than analysts’ expectations.
India Cements is the largest player in South India, which in turn is the strongest market currently in terms of price realizations. Last quarter, its per tonne realizations rose Rs262 per tonne over the June quarter, after adjusting freight costs.
ACC reported a pricing increase of Rs106 per tonne, while in the case of Ambuja Cements, it was Rs88.6 because of the firm’s absence from the southern markets.
According to analysts, India Cements also benefited from holding high levels of coal stock, which helped it manage its costs better in the September-ended quarter. The company relies on imported coal for 70% of its needs, and without the benefit of earlier stock, its costs too would have come under pressure. Peer group companies, however, saw profit taking a hit on account of higher power, fuel and raw material costs. ACC’s per tonne realization (net of freight), rose 3.7% on a quarter-on-quarter basis. But power and fuel cost rose by 26.9% on a per tonne basis, leading to a 8.8% drop in operating profit per tonne. Similarly, Ambuja Cements’ operating profit fell by 5.6% on a per tonne basis, because of higher power and fuel costs. UltraTech Cement’s per tonne figures could be misleading because they include sales of ready-mix concrete. In addition, the company has changed the way it accounts for certain freight costs on inter-unit transfer of clinker. Nevertheless, profit was lower than expected. Signs of cost pressure were already visible in the industry’s June quarter results, when profit of leading firms rose at a rate lower than the increase in revenues. Things have gotten worse in the September quarter, but analysts aren’t worried since the core story of a demand-supply mismatch and hence pricing power remains.
Trading at a valuation of over 5.5 times its book value as on 30 September and around four times its book value for this fiscal, Yes Bank Ltd is by no means cheap. But then, the bank is no stranger to high valuations and expectations.
Yes Bank has been able to sustain very high growth rates, albeit on a comparatively low base and the September quarter was no exception.
Net interest income is up 102% year-over-year, advances are up 102%, deposits 129%, and operating profit up 93%. The bank’s critics have said since its current and savings bank deposits are in single digits, the lender’s cost of funds is high and volatile, given its dependence on wholesale deposits. In the September quarter, for instance, interest expense forms 72.7% of interest earned—up from 67.2% in the year-ago period. What the bank lacks in margins, it has to make up in volumes. High non-interest income, which was a quarter of interest income in the June quarter, also helped. But at the same time, because the bank is expanding rapidly—the number of branches has grown to 60 from 22 a year ago—growth in operating expenses is high. The lender has to frequently dilute equity for growth. As the branch network grows, the proportion of low-cost deposits will rise and the cost of funds will decline. This is exactly what happened with all private banks and Yes Bank will be no exception.
That is why the bank is now setting up an asset reconstruction company, floating private equity funds and getting into business advisory services for small and medium enterprises.
The bank’s stock has outperformed the Bankex this year and investors are hoping the bank will be acquired.
All the upsides seem to be priced into the stock, which perhaps is why the lender hasn’t reacted to the sound second quarter results.
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