FY19 net debt of ₹3,400 cr should lower to ₹2,900 cr in FY22; net debt/Ebitda should narrow from 5.3 times to 3.5 times
Due to the hit from the pandemic and the resulting lockdown, the debt reduction plans of India Cements are likely to be hit
The value of the stake held by Radhakishan Damani and family in Avenue Supermarts Ltd is about ₹1.08 trillion. In February, they sold a 2.3% stake for about ₹3,500 crore to comply with the minimum public shareholding norms. Damani is a famed investor, and traders were in awe of even the timing of the sale in mid-February, just before the markets crashed owing to concerns over covid-19.
So when the Damani family chose to use a fraction of their sale proceeds to invest in shares of India Cements Ltd, there was evidently a lot of excitement on the Street. It so happens that India Cements is now the top stock among Nifty 500 index companies since the markets started correcting in mid-February, rising by about 43%. Shares of other cement firms, on the contrary, are down by about 20%.
But investors should look for more than just buying interest from the Damanis, unless of course they believe that the family will launch a takeover of the company. The value of the shares they don’t already own in India Cements is less than ₹3,000 crore. But there are no indications of a takeover yet.
Note that the family has already had a stake in the company for some years now, but shares of India Cements have still underperformed peers and the Street by a massive margin.
Besides, the company is among the worst placed in the cement industry in terms of profitability and indebtedness, which means investors will do well to be cautious.
According to calculations by Reliance Securities Ltd, India Cements’ earnings before interest, tax, depreciation and amortization (Ebitda) per tonne was at ₹483 in the December quarter. This pales in comparison to its close competitor in the region, Ramco Cements Ltd, whose Ebitda per tonne is 44% higher.
India Cements has also been losing market share in the south, said analysts at Motilal Oswal Financial Services Ltd in a note, pointing to its relatively lower volume growth.
Another big sore point among analysts is the high leverage at India Cements. “We expect debt levels for the company to remain elevated due to high investments in the non-cement business," said the analysts at Motilal Oswal.
However, the brokerage firm’s note added that India Cements’ net debt stood at ₹3,400 crore in FY19, which should reduce to ₹2,900 crore in FY22, while net debt/Ebitda should narrow from 5.3 times in FY19 to 3.5 times in FY22.
Of course, due to the hit from the pandemic and the resulting lockdown, the debt reduction plans of India Cements are likely to be hit. It’s interesting that a company which is worse off owing to the pandemic leads the list of Nifty 500 stocks in the past two months.