Cementing A Better Tomorrow

Deccan Cements will leverage its additional 1 million tonne capacity brought on stream recently

THEboom in the cement industry, thanks to rural demand and government-funded projects, has provided an opportunity for small players to aggressively ramp up their production capacities. Take for instance, the Hyderabad-based Deccan Cements, which is promoted by M B Raju of the Nagarjuna group. The company had a capacity of nearly 8 lakh tonnes at the end of FY 2009. It has used the boom to more-than-double its capacity to nearly 1.8 million tonnes.
    The expanded capacity, which has been commissioned recently, will enable the company to expand its geographical spread and make it one of the key players in the Andhra Pradesh (AP) market.
    Incidentally, AP is one of the largest cement markets in India. It accounted for total cement consumption of nearly 18 million tonnes in FY09, accounting for nearly 10% of the total cement consumption in the country.
    The AP state-based cement makers reported 22% growth in cement dispatches in FY 2009, compared to all-India growth of 8% yo-y during the period. At prevailing cement prices, the expanded capacity will add nearly Rs 350 crore to Deccan Cements' topline on an annualised basis. In FY10, however, the topline gains would be restricted to around Rs 200 crore.
FINANCIALS
Deccan Cements' financial performance in the trailing four quarters ended December 2008 was lackluster. Its net sales at Rs 205.1 crore in the trailing four quarters ended December 08, hardly grew on a y-o-y basis. The company's cement despatches during this period amounted to 622, 000 tonnes, a fall of 1.6 % year-on-year, while its realizations grew by an estimated 2.9 % y-o-y to Rs 3297 per tonne.
    The higher realizations could not offset the company's increased operating costs, including power, oil and fuel, which resulted in the operating profit margin declining by 375 basis points y-o-y to 31.85 % in the trailing four quarters ended December 2008. To fund its additional one million tonne of cement capacity, the company invested Rs 189.5 crore in FY 2008. It had already put in Rs 21.1 crore in FY 2007. This resulted in the company's debt: equity ratio rising to 0.8 at the end of FY 2008, compared to 0.3 in the previous year. Other players like JK Cement's leverage ratio was also 0.84 in FY 2008.
INDUSTRY OUTLOOK
Deccan Cement has expanded capacity at a time when the cement industry is expected to add 25 million tonnes in FY10 and 30 million tonnes in FY11, as per various estimates. The cement industry's capacity at the end of FY09
was 217.8 million tonnes. During FY 09, cement despatches grew 8% y-o-y to 181 million tonnes and exports reducing by 11.8% y-o-y to 3.21 million tonnes. During April 2009, the total dispatches grew 13 % y-o-y to 16.65 million tonnes. The cement industry's utilization rate was 88% in FY09. The boom in the cement industry is expected to sustain the capacity utilization rate at more than 85% levels in FY10. In the cement industry, manufacturers typically hike the prices when the capacity utilization exceeds 85-86%.
VALUATIONS
The stock of Deccan Cements has run up considerably from its 52-week low reached on December 2 last year. At Friday's price of Rs 260, the company's stock trades at a P/E of 4.6. However, players such as Andhra Cement and JK Cements trade at a comparatively higher P/E.
    amrit.mathur@timesgroup.com 

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