Markets
India Cements faces steep earnings cuts as company-specific concerns loom
Summary
- With the entry of Adani Group and capacity additions by larger cement makers, competition is set to intensify
India Cements Ltd is seeing sharp cuts in its FY24/FY25 earnings estimates after it disappointed investors with its unimpressive June quarter (Q1FY24) earnings performance. Shares fell nearly 1.5% on the National Stock Exchange in early deals on Tuesday.
Its cement division posted an operating loss, yet again. Overall, Ebitda (earnings before interest, taxes, depreciation and amortization) saw a sharp year-on-year dip and net loss stood at Rs75.3 crore. Volumes at 2.66 million tonnes (mt) were flat year-on-year and fell sequentially. According to the management, sales volumes were constrained by liquidity crunch being faced by the company.
However, in an attempt to boost its operational efficiencies, the company plans to consult Boston Consulting Group to help cost reduction to the tune of Rs200/tonne by March 2024 at its three plants located in Andhra Pradesh. Also, the management intends to undertake capital expenditure of ₹35 crore over FY24/25 aimed at improving cost efficiencies. To fund this capex, the company expects to generate Rs100 crore via the sale of 80–90 acre of land parcels.
The management expects benefits of easing raw material prices to reflect in the company’s performance gradually, but dealers channel checks show that cement prices have failed to see an uptick in the recent months across most regions in India. This has prompted some analysts to trim their earnings expectations from the company.
“We are slashing FY24/25E Ebitda by 34%/12% to factor in the weak pricing environment," said a Nuvama Research report. Given the company’s long-standing concerns of high net debt and low future return on equity, the brokerage house maintains a Reduce rating on the stock. As of 30 June 2023, the company’s total debt stood at Rs2,950 crore versus Rs2,900 crore in March 2023.
Further, with the entry of Adani Group and capacity additions by larger cement makers, competition is set to intensify. “India Cements lost significant market share (800bp+ over FY10–23) due to lack of capacity additions. We expect its market share loss in the South to continue given the capacity additions by peers," said a Motilal Oswal Financial Services Ltd report.
Mirroring these concerns, the stock has declined around 5% so far this calendar year. “We would monitor the progress on divestment of non-core assets (land) and cost reduction initiatives. India Cements’ valuation at 13.6x FY25E EV/Ebitda appears unattractive," added the Motilal Oswal report. EV is enterprise value.
