How Southern Cement Makers Beat Cash Crunch
The south is a largely non-retail market for cement, and construction demand helped keep prices firm
ET Intelligence Group: Southern cement makers such as The Ramco Cements, India Cements, and Dalmia Bharat have on average clocked 20% growth in sales volumes in the December 2016 quarter, even as the overall industry reported a fall of 1.1% post demonetisation. Revenue growth, too, has been robust, growing at least 15% year-on-year.
There are two reasons for the stellar performance. First, the southern region is largely a non-retail cement market and hence is less dependent on cash. Second, a strong pick up in construction activities in Telangana and Andhra Pradesh (AP) has resulted in prices remaining firm. In the December quarter, estimated cement consumption in AP and Telangana grew by 1.4-1.5 million tonnes (MT) permonthandby 2-2.2MTpermonth in Kerala and Tamil Nadu. Cement prices in the south remained firm compared with a fall of ₹ 10-15 per 50 kg bag in other regions during the quarter, which made cement makers there turn the focus to volumes. But for southern compa- nies, volume growth and cost efficiencies brought about a 19%-50% jump in their net profits.
In the next year, consumption in AP and Telangana is expected to rise by 20-25% while in Tamil Nadu, Kerala and Karnataka, it is likely to grow by 4-10%. This signals a better scenario for The Ramco Cements, India Cements and Dalmia Bharat.
These companies have no capacity expansion planned in the near future as the capacities they aimed to achieve are up and running. Besides, these companies have reduced debt through operating cashflows, which has lowered interest expense, enhancing their earnings. On the valuation front, according to Bloomberg data, Ramco’s enterprise value (EV) is 11.3 times its FY19 estimated EBIDTA while it is 8.5 for Dalmia Bharat. This compares with their past three year EV/EBIDTA of 25-40.