India Cements: Bonding Well For Strong Growth

With its strong brand image and established presence, especially in South India, India Cements is all set to further improve its profitability and capacity utilisation levels which will lead to a positive growth trend for the future.

The India Cements Limited is a cement manufacturing company having brands such as ‘Sankar Super Power’, ‘Coromandel King’ and ‘Raasi Gold’. These brands are also available under subbrands such as ‘Shankar Shakti’ and ‘Coromandel Super Power’. The company’s manufacturing plants are based at various locations in India, including Malkapur, Vishnupuram, Chilamkur, Yerraguntla, Vallur, Sankari, Dalavoi, Sankarnagar, Banswara and Parli. Based on customer requirement, India Cements also supplies its brands in high-density polyethylene (HDPE), paper and laminated packing.

It produces both the variants, namely, blended cement as well as ordinary Portland cement under different grades. Its subsidiaries include ICL Securities Ltd., ICL Financial Services Ltd., ICL International Ltd., Industrial Chemicals and Monomers Ltd., Trishul Concrete Products Ltd., PT. Coromandel Mineral Resources, Trinetra Cement Ltd., Coromandel Mineral Pte Ltd., Coromandel Electric Company Ltd. and India Cements Infrastructures Ltd.

Sector Overview

The cement industry is one of the crucial industries for any economy on which a country builds its infrastructure. The Indian cement industry is the secondlargest cement producer in the world after China and is ahead of US and Japan with a total installed capacity of 480 million tons per annum (MTPA). India is said to consume 7 per cent of the global cement consumption. The Indian cement industry is said to be highly capitalintensive, competitive and cyclical in nature. The industry registered a double-digit growth of 13.31 per cent in cement production at 337.32 million tons in 2018-19 compared to 297.71 million tons in the previous year. Capacity utilisation was also said to have improved in the industry.

Cement production during Q4FY20 has declined by 4.9 per cent on YoY basis led by shutdown of plants from mid-March 2020 due to the corona virus outbreak. Also, the volumes are likely to be lower in May 2020. Looking at the price trend in May 2020, cement prices across India jumped by 10.6 per cent on MoM basis. Region-wise, the price in the southern sector has registered the highest spike by 18.8 per cent on MoM basis. On the cost front, pet coke prices during Q4FY20 were low by 25 per cent YoY. Further supporting aspects include the fall in crude oil prices.

Business Performance

On a quarterly consolidated front, the company’s net sales dropped by 7.91 per cent in Q3FY20 to Rs 1,244.28 crore from Rs 1,351.15 crore in Q3FY19. For Q3FY20 the PBDT decreased as well by 16.42 per cent to Rs 49.48 crore as compared to Rs 59.20 crore for Q3FY19. The company incurred a net loss of Rs 9.43 crore in Q3FY20 as compared to net loss of Rs 7.89 crore incurred in the same quarter for the previous fiscal year. The company stated that its capacity utilisation during the quarter was 69 per cent as against 76 per cent in the same quarter of the previous year.

Also, the overall volume of clinker and cement was lower at 26.66 lakh tons which is a drop of 10 per cent YoY from 29.58 lakh tons. The interest cost was higher at Rs 80.58 crore in Q3FY20 compared to Rs 72.81 crore in Q3FY19 while depreciation was at Rs 61.50 crore for Q3FY20 as compared to Rs 63.18 crore for Q3FY19. This was one of the main reasons leading to net loss incurred for the quarter along with reduced demand.

On the annual front, the company reported net sales of Rs 5,770.37 crore in FY19, up by 6.22 per cent from Rs 5,432.27 crore reported in FY18. PBDT contracted by 14.71 per cent to Rs 314.50 crore in FY19 as compared to Rs 368.76 crore reported in the previous fiscal year. In FY19, the company gained net profit of Rs 25.26 crore in FY19, which is a decrease by 64.17 per cent from Rs 70.50 crore gained in FY18. For FY19, the company reported improvement in its capacity utilisation to 79 per cent from 71 per cent for FY18.

Outlook

The sharp fall in crude oil price would help in bringing down variable costs like power and freight. Therefore, this major decline in variable costs is likely to offset the higher fixed cost. Such cost-saving coupled with higher cement prices are likely to provide support to the overall cement industry in general. Looking forward, once demand will start picking up in H2FY21, the cement sector would see positive signs of recovery. Also, under the current Union Budget, the emphasis on highways and road development is well-placed to boost the demand for cement.

In addition, the development of warehouses and cold storage facilities in rural India would give a push to demand. Various initiatives undertaken by the government, including reduction in corporate tax as well as lowering of interest rates, are expected to stimulate the economy and drive infrastructure and affordable housing demand. A key growth factor for India Cements is demand revival in South India which has recently seen a drop after many projects were stalled in Andhra Pradesh and Telangana. Additionally, pricing improvement is expected to bring about better revenues.

The company has also launched ‘Coromandel Super Kings (CSK)’ in Kerala which is being sold at a premium price of Rs 40 per bag. Despite the setback experienced due to the pandemic, the demand for the company’s products is expected to increase. India Cements is considered to have a strong brand image with it being a key player in the South India markets. Recently, billionaire Gopikishan Damani who is the younger brother of D-Mart supermarket chain founder Radhakishan Damani, invested 2.8 percent stake in India Cements to an additional 2.7 percent equity owned previously, while Radhakishan Damani also bought additional 0.9 percent equity. This has drawn significant attention as the company also continues to take efforts to reduce its debt and further improve its profitability and capacity utilisation levels which will further lead to a positive growth trend for the future. Hence, we recommend HOLD.