India Cements: Deleveraging of balance sheet key trigger

While India Cements stock has lost 2.2% after September quarter results were announced, demonetisation has led to correction of 26.4% since 9 November


Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Chennai-based cement maker India Cements Ltd’s net profit surged 62.1% to Rs62.41 crore year-on-year (y-o-y) in the September quarter, aided by lower finance cost and tax expenditures. Net sales improved 6.7% y-o-y to Rs1,307 crore. Both net profit and net sales exceeded Bloomberg estimates of Rs58.09 crore and Rs1,145.60 crore, respectively.

Volumes grew more than 10% y-o-y, but realizations slipped. Also, the quarter’s Ebitda at Rs2,244 crore was marginally below estimates of some analysts. This miss was primarily due to increase in minimum wages, which resulted in a sequential rise in employee cost/tonne. Ebitda stands for earnings before interest, tax, depreciation and amortization.

While the stock has lost 2.2% after the September quarter earnings were announced, i.e. in the last three trading sessions, the anticipated short-term negative impact of currency ban has led to correction of 26.4% since 9 November.

In a post-earnings conference call, the management said demonetization of Rs500/1,000 notes has not affected sales volume till date and the proportion of cash in cement purchase is only 10-15%.

But some brokerage firms have raised a red flag by trimming their Ebitda estimates. “Our channel checks indicate pressure on demand in most parts of the country. We expect dispatches to get impacted going ahead. We revise our Ebitda estimates downwards by 3.3%/13.8% for FY17E/FY18E to factor in lower demand in H2FY17 due to the demonetization issue,” Emkay Research said in a report. Sharing a similar view, Reliance Securities Ltd too has cut Ebitda estimates by 6% and 15% for FY17E and FY18E, respectively.

Meanwhile, in the first half of this fiscal year, India Cements has repaid Rs80 crore debt and aims at debt repayment of Rs170 crore in the second half. The management expects debt refinancing to reduce interest costs by 75 basis points. A basis point is 0.01%.

Apart from that, the company would incur Rs200 crore towards maintenance capex in FY17 and another Rs400 crore towards replacement of mills and maintenance capex.

Shares of India Cements are currently trading at a one-year forward price-to-earnings multiple of 15.21, lower than peers. Although demonetization is a near-term dampener, the company is poised to benefit from deleveraging of balance sheet in the long term and this would be a trigger for valuations.

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