India Cements: Leveraged balance sheet to keep valuations lower

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The India Cements Ltd stock trades at a discount to peers and this gap in valuations is likely to remain (see Chart 1).

The south India-based cement maker’s operating performance in the September quarter exceeded analysts’ estimates mainly due to better-than-expected realizations.

However, akin to its peers, power and fuel costs along with freight cost surged sequentially, due to hardening petroleum coke (petcoke) prices. The usage of petcoke remained at 81% for the half-year in the overall fuel mix, said the company.

Also, cement demand was impacted by shortage of sand and political instability in its key market of Tamil Nadu. Overall cement volume during the quarter, including exports, stood at 2.7 million tonnes.

It should be noted that the September quarter earnings are not comparable with the year-ago period due to merger of Trinetra Cement Ltd and Trishul Concrete Products Ltd with India Cements.

With subdued demand alongside a huge capacity overhang, the cement industry in south India continues to reel under pressure as capacity utilization remains low. To tackle this, the company is diversifying into northern and western markets, which is a positive.

However, the aforementioned issues are not unique to India Cements. Then why is the stock lagging south-based peers? The answer lies in Chart 2, which shows that the company’s balance sheet remains highly leveraged.

According to analysts, though India Cements aimed to aggressively cut debt, one has not seen a consistent downward trend in its long-term borrowings. Also, there has been an increase of Rs340 crore in short-term borrowings in the September quarter.

In a post-earnings conference call with analysts, the company’s management said working capital requirements were stretched during the quarter.

Analysts do not foresee significant debt reduction in this fiscal year and this factor would be a drag on the stock’s performance and valuation.

Meanwhile, the India Cements stock surged 3.57% intraday on BSE reacting to the earnings, but the rally fizzled out and it ended Thursday’s session in the red. On a year-to-date basis, the stock has gained 49% and upside is limited, say analysts.