South cement companies like NCL Industries, Deccan Cements, KCP reported higher profits for Q1

ET Intelligence Group: South-based cement companies reported higher profits for the June 2015 quarter. This was the second consecutive quarter of good growth helped by increased cement prices in the region, ability to find a balance between demand and supply, and lower raw material cost relative to sales. According to industry trackers, the momentum is likely to continue for the next two years on account of production discipline, fairly stable demand and limited capacity addition in the region.

While small companies such as NCL Industries, Deccan Cements, KCP and Sagar Cements have turned profitable, mid-sized cement manufacturers such as The Ramco Cements, and India Cements showed improvement in their earnings in the June 2015 quarter. In the June 15 quarter, cement prices in the south market grew by 16 per cent year-on-year in the range of Rs 330-400 per 50 kg bag. In contrast, they either dropped or remained constant in other parts of the country. For midsized companies such as The Ramco Cements and India Cements, cement realisation measured in EBIDTA per tonne improved in the range of 75-85 per cent from previous year's June quarter. Besides this, lower fuel costs boosted the earnings of companies. In addition, five out of the six regional cement companies reported a drop in the raw materials – sales ratio, which helped the growth in their operating profits.

During the next two years, there are two factors which would boost demand in the southern region. First, the south based companies have been following high production discipline which involves producing cement in accordance with the demand. Consequently, there will be limited capacity addition for the next two years, which means there would be no fierce pricing war.

On the valuation front, considering FY17 earnings, The Ramco Cements and India Cements are trading at EV/tonne of $146 and $55 respectively, while small companies such as NCL Industries, Deccan Cements, KCP and Sagar Cements are trading at EV/tonne range of $30-85. Considering the growth prospects, investors may find these valuations attractive.