It's back to basics for Srinivasan

Last Updated: Tue, Jun 18, 2013 04:40 hrs

Recent months have seen a spate of bad news for India Cements. First came the allegations of betting on IPL matches by Gurunath Meiyappan , the son-in-law of the company's vice-chairman and managing director, N Srinivasan, and then of wrongdoing with regard to its investments in Bharathi Cements. The Central Bureau of Investigation is probing the investments made by India Cements in Bharathi Cements which is owned by Y S Jagan Mohan Reddy, as it alleges the investments were made in lieu for provisioning of water from the Krishna river to India Cements factories.

With these two pieces of bad news, the India Cement stock came hurtling down to a 52-week low to Rs 65 on May 25 as investors worried about the company's prospects (the stock closed at Rs 63.90 on BSE on Monday). But it is business as usual for Srinivasan who was forced to step aside as the president of the Board of Control for Cricket in India until the investigation in the spot-fixing scandal was completed.

Brushing aside all concerns about the future, he says stock prices fell as a result of the "adverse media campaign". "We are not disturbed by the controversies since our fundamentals are strong. In fact, we are better focused today," says Srinivasan.

The investor anxiety, however, may not be completely unfounded. India Cements posted a 60 per cent drop in net profit from Rs 64.92 crore in the quarter ended March 31, 2012 to Rs 26.28 crore in the quarter ended March 31, 2013. Srinivasan attributes the drop to market pressure, higher freight charges and handling expenses as a result of the increase in diesel prices. But there are other worries for the company as well. For example, its loan book as a result of advances made to its associates and subsidiaries has ballooned to Rs 2,372 crore as on March 31, 2013. V Srinivasan, analyst (power and cement) at Angel Broking says, "The advances to unlisted arms are a cause of concern. These funds could have been put to better use within the company".

There are signs that India Cements is taking some steps to restore investor confidence. Srinivasan is reorganising the business from being a diversified conglomerate with interest in finance, cements, power, coal, shipping and infrastructure to one primarily focussed on cement. The company has also set itself a target of increasing its cement capacity from 10 million tonnes to 14 million tonnes per annum. The decision to return to the core has partly been prompted by the steady fall in per tonne valuation of the company (to $60 against the market rate of $200 a tonne), which had created a perception that the company was focussing more on non-core businesses.

As a part of the restructuring exercise, India Cements is planning to partially or fully exit some businesses which no longer hold relevance. "We are working on whether to merge, hive-off or sell and how to make all these businesses profitable, so that they can grow independently," says Srinivasan. India Cements has nine subsidiaries including ICL Financial Services, Industrial Chemicals and Monomers Ltd. The company is planning to merge Trinetra Cements, a subsidiary which runs a 1.5- million-tonne cement plant in Rajasthan. However, it has no plans to put its IPL team, Chennai Super Kings, on the block , even though analysts say it has been a drag on its operating margins. It will be part of India Cements as it holds tremendous brand value, says Srinivasan.

The foundation for the reorganisation currently under way was laid a few years ago when India Cements decided to integrate some of its non-core businesses such as coal, power and shipping that have synergies with its core cement business. The company had ventured into these business to reduce the uncertainty in the availability of critical inputs like power, coal and transport. In the last few years, India Cements has invested around Rs 1,150 crore in the integration process. The investments included Rs 900 crore in captive power, Rs 100 crore in coal and Rs 150 crore on purchase of two ships.

"Going forward, the impact of this (the integration) will be seen in the EBIDTA. For instance, having captive coal mine will result in saving of around $5-10 per tonne of coal. From the power plants, the company expects around Rs 70 crore of savings in input costs," says Srinivasan. The first shipment of coal from India Cement's mine in Indonesia has already started and the cargo will arrive by the end of this month.

An extension of the company's forward integration programme has been its foray into the infrastructure structure sector through a new wholly-owned subsidiary last month. Through its new subsidiary the company hopes to explore, execute and manage all types of construction and development works including roads, highways, expressways, subways, harbours, rail, and metro systems, inland container depots, power projects and airports, among other projects. According to analysts, with the government encouraging infrastructure companies to raise funds at competitive rates, money would not be a problem for the new company. Besides, the Panning Commission's target to double infrastructure investment to $ 1 trillion (around Rs 55,00,000 crore) in the 12th Five-Year Plan will open a huge opportunity for the company.

To start with, the company says it will bid for smaller infrastructure projects with a ticket size of Rs 30-35 crore. "The infrastructure foray is only a baby step and India Cements has not made any major investments into the new subsidiary. For now, India Cements will mainly take up cash projects in the field and not public-private partnerships. Once the order flow increases, it will look at building the expertise for handling large projects," says a company official.

Srinivasan of Angel Broking says the integration programme will help the company get coal at an assured price. However, he says with growth for the industry muted at 7 per cent per annum (as against 10-12 per cent during boom times), it will take at least three to four years for India Cements to utilise up to 90 per cent of the additional capacity that it is putting up.

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