S. Vaidya Nathan

SHAREHOLDERS of India Cements can remain invested, as there is the prospect of a sizeable decline in losses over the next two years.

With price levels and demand improving in the southern market over the past couple of months, the company's performance in the January-March quarter could lead to a sharp reduction in losses. As it has lined up fund mobilisation plans, its interest burden could decline to more manageable levels in FY-06.

There were buy recommendations outstanding at prices between Rs 13 and Rs 47 in 2003 and we had maintained a `hold' on the stock last year.

Our bullish view on this loss-making company was driven by the debt restructuring package that has led to a reduction in the interest burden and provided leeway by postponing the due dates for repayment of loans; a more important factor is the possibility of roping in of a strategic partner to provide a sustainable route to restoring financial health.

Despite a five-percentage-point expansion in operating margins, India Cements' operating profits still do not cover even its reduced level of interest burden.

It plans to mobilise about Rs 250 crore through the equity route (priced at Rs 47 per share). This could cut the debt levels to an extent. If the company manages to replace a part of its debt with funds sourced at lower rates (it plans to raise Rs 400 crore through the non-convertible debentures), there could be a more meaningful reduction in the interest outgo.

From a long-term perspective, there has to be a substantial improvement in operating margins if the company is to generate earnings that can support its sizeable equity base of about Rs 140 crore; the proposed equity offer would also expand the capital base by Rs 45-50 crore.

This would place its equity base at levels higher than those of ACC, Grasim, Gujarat Ambuja and UltraTech Cement, which have capacity of 15-18 million tonnes each; India Cements now has a capacity of about 8 million tonnes.

India Cements would be hard-pressed to attaining operational efficiencies that would provide margins in excess of 20 per cent that Gujarat Ambuja, Madras Cements and Shree Cements manage.

The southern market is also expected to remain in surplus for at least a couple of more years and this is likely to hold the prospect of volatile trend in cement prices with a downward bias, as has happened for the past few years.

In this backdrop, we maintain our view that India Cements could become a part of the consolidation process, which could also involve a strategic alliance. For MNCs eyeing an Indian presence, India Cements and Jaiprakash Associates are likely to be prime candidates as they offer a sizeable capacity. Any progress on this front could provide a positive and offer a substantial upside potential.

When the cement sector is in a bullish phase, deals of this genre are usually cut, as pricing is more attractive. A strategic partnership could fast-track the process of restoring a healthy complexion to India Cement's operations. Shareholders can remain invested with a one-year perspective and review their position based on any restructuring/acquisition-oriented developments.

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