Crafting of India Cements Ltd

India Cements Ltd (ICL) is one of the leading cement manufacturing companies in India and is also a market leader in South India. With the commissioning of 1.5 mtpa (metric tonnes per annum) cement plant at Mahi, Rajasthan in October 2010, the installed capacity of the consolidated entity has reached 15.5 mt of which 14.1mt is on standalone basis. The company’s business is diversified and also engaged in shipping with ICL owning two vessels and possessing wind farm in Coimbatore. The cement major has started using coal from its Indonesia mines for its captive power plants. The coal has high moisture and hence, generates fly ash for using in blending.

India Cements Ltd holds more than 60 per cent stake in Trinetra Cement Ltd (TC). In the first half of the 2017 calendar year, the amalgamation was successfully completed between the two entities. The merger has resulted in bringing all cement assets under one roof - India Cements and helping the company becoming a stronger entity. Post-merger, ICL is having at its command an annual cement production capacity of 15.5 million tonnes from eight integrated cement plants including the Banswara plant, Rajasthan and two grinding units one each in Chennai, Tamil Nadu and Parli in Maharashtra.

After the Merger with Trinetra Cement Ltd

Post the merger with Trinetra Cements, the regional mix of ICL is spread across the states with highest share of 45 per cent from Tamil Nadu and Kerala, followed by 13 per cent share in Andhra Pradesh and Telangana and 10 per cent in Karnataka. The rest of the markets such as Maharashtra, Gujarat, MP, Rajasthan & others, including exports comprises of 32 per cent sales share of ICL.

For the quarter ended in June, the reported performance is not comparable on year to year basis owing to the merger with Trinetra Cements. Despite reaching out to non-core markets, realisations increased 7 per cent on year on year (YoY) and 5 per cent quarter on quarter (QoQ) basis and have remained unchanged in the first quarter of 2018.

On year on year basis, sales in south region decreased by 8 to 10 per cent. Notwithstanding the demand decline in target markets, the total sales volume stood at 2.7 metric tonne (mt), including TC’s contribution of 0.375mt. The sales volumes were broadly flat on year on year basis on like-to-like basis. The company moved volumes from its South and Maharashtra units into the Trinetra Cement’s markets of Madhya Pradesh (MP) and Gujarat. ICL sold higher volumes in West and Central markets from South plants. Accordingly, 15 per cent YoY in non-core territories made up for the volume loss in South and helped in maintaining overall flat volume trend YoY.

During fiscal 2017, ICL repaid standalone debt of Rs 230 crore, inclusive of Trinetra Cement and moreover, going ahead, the company is comfortably positioned to repay additional debt as and when it matures. It also expects the credit rating to upgrade in the short term, which should aid to reduce the cost of funding.

Demand of cement across States

The all India-cement demand according to ICL stood flat YoY in the first quarter of fiscal 2018, whereas the demand decreased 6 to 8 per cent on year to year in South and 6 per cent year on year in West, in both Maharashtra and Gujarat.

In Tamil Nadu and Kerala, the demand of cement decreased 11 per cent, 12 per cent in both Andhra Pradesh & Telanagana and by one per cent in Karnataka on year to year basis.

Drivers of sales volume

Despite the decline of demand in target markets, the volumes have stood flat on year to year basis as the company has penetrated in the non-core markets. Within South, ICL’s volumes posted decrease of 10 per cent in Tamil Nadu and Karnataka, and were flat in Andhra Pradesh, Telangana and Karnataka.

The extended dormant effect of demonetization, severe river and sand shortage, political instability in Tamil Nadu and in addition to all these factors, the half in off take of cement ahead of Good and Services tax (GST) also impacted the sales volume of the cement maker, during the quarter end June 2017. On the other hand, the shortage of sand issue has been resolved in Tamil Nadu from July 2017 with sand mining resuming and accordingly, construction activities have been picking up since then.

The management expects the second quarter sales volume to improve over the first quarter of 2018 given at present the market is relatively steady with GST hiccups being settled and moreover the sand issue has also resolved.

EBITDA Tales

India Cements Ltd results for the first quarter of fiscal 2018 appears to be disappointing on account of Rs 185 crore EBITDA lower than the estimate of Rs 200 crore.

During the first quarter of 2018, the non-recurring costs stood at Rs 12 crore led by the higher costs to meet emission norms and non-recurring ESOP expenses, implying adjusted EBITDA of Rs 197 crore. The variable costs have largely been in line where as the employee costs increased 16 per cent QoQ. Of the total quarter on quarter increase of Rs 15.4 crore, Rs 6.9 crore was owing to ESOP expenses, while the rest was due to revision in salaries.

During the first quarter, pet coke consumption at kilns was 83 per cent and average pet coke cost for the company was USD 90/t. The company reduced its clinker inventory by nearly 0.2mt as production was impacted owing to shutdown of few plants for maintenance to comply with environmental emission norms. At present, all plants stand fully complied.

Focus on Utilizations

The senior management recapitulated its earlier comment to continue its focuson improving its capacity utlilisation. The company will not undertake any further capacity expansions until it reaches 85 per cent level of utilization as against 70 per cent in 2017.        

The company incurred capital expenditure of Rs 24 crore in first quarter of fiscal 2018 and the management has given guidance  of Rs 150 to 200 crore for capex for the fiscal 2018.

Committed to deleverage

For the first quarter of 2018, ICL has total gross debt of Rs 3,170 crore, inclusive of working capital and cash balance of Rs 8 crore as against Rs 2,920 crore in the last quarter of fiscal 2017. Since the last two years, management focus has been on the repayment of debt and it continues to remain committed to deleverage. The management expects to repay Rs 230 crore in fiscal 2018.

On quarter to quarter basis, the interest costs increased by 7 per cent owing to the increase in working capital loan by Rs 250 crore. However, this rise in the working capital is purely seasonal and will taper during the year.

Reduction in overall costs

Going forward, the management looks to decrease its overall costs by focusing on reducing freight costs post-GST; improvement in sales volume in Tamil Nadu and Kerala, which means more of trade and blended cement sales; and the increased volumes will benefit the operating leverage.

Exit Infra division

The Tamil-Nadu based cement manufacturing company is committed to exit its non-core operations. ICL has recently shut its infrastructure segment. The division witnessed EBITDA loss of Rs 4.5 crore in the first quarter of fiscal 2018 and loss of Rs 15 crore in fiscal 2017.

Valuations and Risks

ICL will be a beneficiary of high cement prices in South and the expected demand revival in Andhra Pradesh and Telangana. The enterprise-to-EBITDA (EV/EBTIDA) ratio is used for valuation as the ratio is more representative of the cyclical and capex-intensive nature of the cement sector. With expected demand recovery in industry dynamics and management’s focus on debt reduction and increase in capacity utilization, India Cements Ltd is valued at nine times the expected EV/EBITDA of 2019.

The major risks faced by ICL are the sharp decrease in the cement demand and increase in operating costs. Moreover, it also risk of sharp decline in cement prices.

neha.seth@outlookindia.com