As construction picks up, South-based cement firms see demand rising

ET Intelligence Group: After years of a bad phase, south-based cement companies are seeing a gradual pickup in demand. According to ET’s interaction with some southbased cement companies, the momentum is likely to sustain as the construction activities are likely to pick up in Andhra Pradesh and Telangana. It is estimated that construction activities in the two new states are expected to give rise to demand of 23MT in the next two years. Also the proximity of their plants to these states is likely to save a lot of freight cost which is a major cost for the cement companies. Higher cash flows will also help these companies to deleverage their balance sheets which can lead to re-rating of these stocks.

Deccan Cements

The Hyderabad-based company has lowered its debt by less than half over the last five years. And the gradual pick up in earnings over the last two quarters has improved cash flows of the company. It has captive limestone mines and strong coal linkages. In the March 2015 quarter, its profits almost trebled over last year, and June quarter is expected to be good too.

NCL Industries

It reported a 46 per cent sales growth in the March 2015 quarter and a strong turnaround on the bottomline. It also has a board business (cement bonded board which is widely used) and hydropower plant. The board business, which is like a consumer business, brings close to one-fifth of the company’s total revenue, is growing in double-digits and has operating margins of 17 per cent. At an EBIT of Rs 15.5 crore in FY2015, the board business can be valued at Rs 150-175 crore while company’s total mcap isRs 330 crore.



KCP

KCP’s cement plant is very close to the proposed new capital of Andhra Pradesh, which will save a huge amount on freight cost for KCP. In FY15, freight cost was 10 per cent of the total expense, which also included expenses of other businesses – engineering and Sugar. KCP has a sugar business in Vietnam, which is profitable with EBIT margin of 10 per cent. The engineering business which is 7 per cent of revenues is making loss but should pick up with the revival in the economy.

Sagar Cements

Sagar cements’ capacity has almost doubled to 2.35 mt after acquiring BMM cement. Sagar cement has a strong presence in the Andhra Pradesh market, and through BMM, it will tap key markets in Karnataka, Tamil Nadu and South Maharashtra. The Company has already announced its June 2015 quarter results in which it reported aRs 23 crore profit against a loss of Rs 9 crore last year