Sharekhan downgrades India Cements to HOLD

Sharekhan downgrades India Cements to HOLD

India Cements’ Q2FY09 revenues grew by 24.2% year-on-year to Rs945.5 crore. This includes revenues of Rs49.9 crore from Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement business rose by 17.65% y-o-y.

The revenue growth during the quarter was mainly driven by higher realization and volume. The realization for the cement division increased by 12.1% y-o-y to Rs3,688 per tonne and the volume increased by 4.9% to 2.42 million metric tonne (MMT).

The operating profit margin (OPM) declined by 970 basis points to 30.7% mainly on account of sharp increase in power and fuel cost, raw material cost and other expenses (due to cost of IPL franchise). Consequently the operating profit fell by 5.6% to Rs290.1 crore.

On a per tonne basis, power and fuel cost increased by 30% to Rs932 due to increase in coal price.

The reported profit after tax (PAT) went down by 39.7% y-o-y to Rs134.2 crore. During the quarter the company had a foreign exchange translation loss of Rs29.6 crore. Thus, the adjusted PAT declined by 29.2% y-o-y to Rs154.61 crore.


In terms of outlook, the present demand-supply scenario is much better in the southern region compared with other regions.

However, over the next two years the demand-supply dynamics would gradually turn unfavorable, as 40% excess capacity is coming up in South India over next two years and due to slowdown in the key user industries like infrastructure and information technology (IT), which will impact the realization.

Hence we have revised our earning estimates downward to factor in a lower than expected volume growth and higher costs.

We expect the company to post earnings per share (EPS) of Rs19 and Rs17.5 for FY2009 and FY2010 respectively.

At the current market price the stock trades at 4.7x FY2009 earnings estimate, an enterprise value (EV)/earning before interest, tax, depreciation and amortization (EBITDA) of 3.2x and EV/tonne of $58 (including wind mill and shipping division) in FY09. We are downgrading the stock to HOLD with price target under review.