ICICI Securities bullish on India Cements

NetScribes/R Radhakrishnan

It is almost six months since cement sector scrips moved out of the investment radars of the bourses. The reasons: the impending oil price hike, sluggish offtake and the monsoons. Surprisingly, some investment bankers like ICICI Securities have turned bullish on the south-based India Cements (ICL), the fourth largest cement producer in the country.

ICICI Securities, in its update dated September 26, has recommended a 'buy' on ICL at the price level of Rs 41. The scrip, however, closed lower at Rs 39 on the Bombay Stock Exchange Tuesday. I-Sec's update was triggered by ICL's September 25 announcement that the company was expanding capacity by 5 per cent from its current level of 7.5 million tonne through debottlenecking. ICL is planning to convert its 0.6 million tonne wet process capacity into a dry process. Both these projects are expected to cost Rs 1.2 billion.

"The sectoral capacity is expected to touch 140 million tonne by fiscal 2005, a compounded annual growth rate (CAGR) of 5 per cent from the fiscal 2000 level of 118 million tonne. We expect a CAGR of 10 per cent in demand till fiscal 2005, indicating enough room for blended cement. We foresee a deficit from fiscal 2002 in this sector. The pricing power will return to the producers from fiscal 2002," the I-Sec update stated.

The current domestic cement consumption is around 90 million tonne a year, with the southern region accounting for 22 million tonne. The bullishness in ICL stems from the opportunity that is likely to emerge on account of growing deficit in the southern region. The deficit in the southern market, which is one million tonne, is expected to widen by 25 per cent in the years to come, according to industry estimates.

I-Sec seems to have placed its bets on ICL based on the hope that Vishnu Cements and Visaka Cements would be merged with ICL. ICL recently acquired both companies. ICL catapulted into the big league after acquiring Raasi Cements. The acquisition is yet to reflect on the bottomline though debts have mounted as a result of acquisitions.

"ICL is sure to merge Vishnu Cements into its fold. However, Visaka is doubtful because the latter has huge debts and is a loss-making company. The Visaka merger will upset the debt-equity ratio of ICL," a research analyst with a European investment bank said.

ICL is trying to reduce interest costs through refinancing. The refinance rate is 3.5 per cent lower than the earlier rate of 17 per cent. During the first quarter of the current fiscal, ICL reported lower profits due to higher interest costs. The impending oil price hike will lead to higher freight costs as 50 per cent of materials are transported by road. But the company is working on new operational initiatives which will lead to a cut in freight costs through better coordination, the analyst said.

"Cement prices will remain flat on a year-on-year basis though they are likely to decline during the monsoon months of November-January in the south," the I-Sec report stated. "We expect marginal growth in volumes and a 10 per cent rise in prices over the current average of Rs 180 per bag. The net realisations for ICL will be marginally higher due to control over its input costs," the analyst said. He expects ICL to post a net profit of Rs 650 million in the current year while I-Sec pegs it at around Rs 675 million.

The stock trades at a price-earnings multiple of 8.3 times on fiscal 2001 earnings. But all these estimates and hopes could come to nought if the government announces a big hike in oil prices.

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