How South­ern Ce­ment Mak­ers Beat Cash Crunch

The south is a largely non-re­tail market for ce­ment, and con­struc­tion de­mand helped keep prices firm

The Economic Times - - Smart -

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.

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