From January this year, until the announcement of the March quarter results, shares of India Cements Ltd (ICL) rose around 8% as cement prices increased faster than expected. Investor expectations were accordingly of improving realizations and higher profit for the quarter. But, on a year-on-year (y-o-y) basis, net profit plunged by 60% to Rs38.2 crore although revenues rose by 8.5% to Rs974.3 crore. Little wonder then that ICL shares closed 2.3% lower on Friday at Rs127.40 each.

Employee cost increases, too, hit margins hard as it rose 30% on a y-o-y basis and 37% sequentially, resulting from one-time provisioning. This increase in costs was reflected as the percentage of total expenses to sales shot up from 73.8% to 86% on a y-o-y basis. Consequently, operating profit in the March quarter fell by 42% compared with the year-ago period, to Rs136 crore. The operating profit margin (OPM), too, dropped to 13.7%, compared with 26% in the year-ago period, and 14.3% in the preceding quarter. In fact, on an annual basis, ICL’s OPM has steadily fallen from 36% in fiscal 2008 to 22% in fiscal 2010.

Graphic: Ahmed Raza Khan/Mint

However, it is a given now that bunched-up surplus capacity will hit the markets in the second half of fiscal 2011. And about 49% of new capacity is coming up in the south. Despite its strong brand equity, therefore, ICL, which has nearly 80% of its revenue accruing from the south, may see higher competition and pricing pressures in the next several quarters. Cement dealers say that prices in the southern markets, especially Andhra Pradesh, are already weakening.

ICL is now introducing its brand in western Indian markets on the strength of its franchise Chennai Super Kings’ victory in the Indian Premier League. Its new plant in Rajasthan will be operational by mid-2010. It remains to be seen whether this will give it better realizations in the longer term.

For the next 12 months, the road ahead seems tough with analysts’ consensus on OPM for fiscal 2011 dropping further to 18-19%. Following its equity placement early this year, the enhanced equity capital resulted in earnings dilution. ICL posted earnings per share of Rs12 for fiscal 2010. At a price of Rs127 each, the share trades at a discount of about 16 times to fiscal 2011 earnings estimates of about Rs8, offering hardly any scope for near-term appreciation.

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