BackIndia Cements: Price revival brings little cheer
At the end of the December quarter, gross debt was ₹3,540 crore, up from ₹3,100 crore in the year-ago periodThe company’s intent to create capacity over paring debt is discomforting to analysts
PremiumIt is said that debt is like any other trap: Easy enough to get into, hard enough to get out of. And, this is precisely what India Cements Ltd’s investors are worried about.
Punished for the dismal performance on margins and realizations in the December quarter, the stock hit a 52-week low of ₹74.75 on Tuesday.
Although cement prices in south India were recently raised by ₹30-35 per 50kg bag, analysts are sceptical about these steep price hikes persisting. Even if they do, India Cements’ ballooning debt due to capacity expansions, is feared to counter the positives of better realizations.
At the end of the December quarter, gross debt was ₹3,540 crore, up from ₹3,100 crore in the year-ago period, the management told analysts in a post-earnings conference call.
It should be noted that India Cements has been a case of swollen debt for some time now. What is turning analysts off is the fact that no major steps have been taken to clean the balance sheet. On the contrary, chances of further stretching are highly likely.
If the price hikes are absorbed by the market, the company would pursue capital-expenditure opportunities in central India and other locations. Further, the south-based cement maker is looking to spend ₹150-200 crore a year on various projects.
Even though India Cements aims to reduce gross debt by ₹200-250 crore in the current quarter, its repayment liability for fiscal year 2020 is estimated at ₹3,750 crore.
“The company is adding capacities in Madhya Pradesh and Uttar Pradesh at a cost of ₹1,200 crore. We believe this ongoing expansion might further swell its debt, by another ₹500 crore. With current debt levels of over ₹3,500 crore and low margins (12-13%), we expect return ratios to be constrained till FY20," ICICI Securities said in a report on 13 February.
In short, the company’s intent to create capacity over paring debt is discomforting to analysts.
No wonder then that the stock price has halved in the past year. The scrip now quotes at ₹84.25 on the National Stock Exchange. Similarly, valuations are nothing to write home about. On an EV/Ebitda basis, the stock trades at a price-to-earnings multiple of around six times, lower than its peers. EV is short for enterprise value and Ebitda is earnings before interest, taxes, depreciation and amortization.
Unless the company does some serious deleveraging, even a price revival would not be of much help to boost the stock’s performance.
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