India Cements: a question of valuations
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Shares of India Cements Ltd have been seeing sharp swings following its March quarter earnings declared on 27 May. A look at its valuations is instructive.
On a one-year forward price-to-earnings basis, the stock is trading at a multiple of around 22 times. This is cheap considering that the company is one of the largest cement producers in southern India and enjoys good brand recall in the region. But analysts expect the stock to continue to trade at a discount to peers, at least in the near term.
First and foremost, India Cements’ leveraged balance sheet. On a stand-alone basis, the company repaid Rs234 crore and on a consolidated basis, debt declined by Rs200 crore. Gross debt at the end of 31 March was Rs2,920 crore. In fiscal year 2018 (FY18), it aims to repay nearly Rs175 crore. If profitability improves, repayments could be higher, the management said in a post-earnings conference call. The pace at which India Cements reduces debt will be closely watched.
The second factor is its exposure to non-cement businesses. According to analysts, high investment in non-core businesses and lack of management focus on core business are likely to keep the valuation low. Though the management has indicated it will divest its interest in the shipping and infrastructure divisions in 18 months, it is unlikely to immediately reflect in valuations.
“With pricing discipline in south and improving profitability, it has shown de-leveraging over FY16/FY17. However, despite strategically located plants, the company’s cost structure is relatively higher due to dependence on grid power, higher lead distance, vintage plants and low utilizations,” said a report by Motilal Oswal Securities Ltd. Subdued return ratios compared to peers would also keep valuations at a discount, added the brokerage firm.
While India Cements will be a key beneficiary of demand recovery in south India, especially in Andhra Pradesh and Telangana, the key trigger for a higher valuation remains improvement in capital allocation and debt reduction.