India Cements: Valuations cheap, but upside could be limited

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One common factor in the earnings of many cement companies in the quarter gone by was better operating margins. Cement firms have benefited from easing power and fuel prices and the case wasn’t any different for South-based company India Cements. On a year-on-year (y-o-y) basis, its “power, oil and fuel” cost fell 14.16% in the June quarter. Raw material prices too softened, aiding Ebitda (earnings before interest, tax, depreciation and amortization) margins, which improved by 157 basis points y-o-y.

A basis point is one-hundredth of a percentage point.

Stand-alone net profit rose 16.35% to Rs.43.98 crore in Q1FY17, beating the Bloomberg estimate of Rs.37.03 crore, courtesy improved operating performance. Though the stand-alone sales figure declined slightly y-o-y, at Rs.1,202.49 crore, it was higher than the Bloomberg estimate of Rs.1,093.3 crore.

Realizations, however, were a disappointment. “Realization dropped by nearly 12% YoY owing to price correction seen in Andhra Pradesh/Telangana and Western markets,” brokerage house Reliance Securities said in a note. However, this fall was compensated by volumes, which rose to 23.07 lakh tonnes from 20.81 lakh tonnes earlier. The company foresees sales volume growth at 10% for FY17.

Meanwhile, the company repaid debt worth Rs.15 crore in the June quarter, for which the stock has been rewarded. Shares of the company continued to head northwards. After first quarter earnings were announced on Thursday, the stock ended Friday’s session more than 5% higher.

Priced at 16.72 times one-year forward earnings, the stock is trading at a discount to peers like Ramco Cements (20.63) and Dalmia Bharat (30.52). On a year-to-date basis, the shares of the company have underperformed its peers but outperformed the Sensex.

“The company is trading at a cheaper valuation compared to its Southern peers, however from hereon we see limited upside in the stock, since the benefits seen in this quarter; easing fuel and power prices for instance, may not sustain going ahead as petcoke prices have begun to harden,” cautioned Hemant Nahata, an analyst with IIFL Holdings Ltd