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Wednesday, October 21, 2009

Prism Cement Ltd:Future growth prospects and outlook

Scripscan:Prism Cement Ltd

Story:Prism Cement, though a long-standing player in the north and central market, has faced constraints in cashing in on the region’s growing demand as its capacity is capped at 2.5 million tonnes.In the June ’09 quarter, when the North recorded a 22 per cent despatch growth and the central and east regions recorded over a 12 per cent growth, Prism Cement reported a muted 2 per cent growth in despatches.With no additions to capacity in the last one year, the company may have ceded market share to those which have already added capacity.The markets served by Prism Cement — Uttar Pradesh, Madhya Pradesh and Bihar — are home to some of India’s leading cement companies — Grasim Industries, UltraTech Cement and Shree Cement.While this may ensure strong prices in the region, Prism Cement may be unable to ramp up volumes to fully benefit from this. These three players ramped up their capacities in the past year.In 2008-09, Aditya Birla Group added 6.6 million tonne and Shree Cement one million tonne. In the June ’09 quarter, UltraTech and Grasim reported a 19 per cent growth in despatches and Shree Cement, an astounding 29 per cent.For Prism Cement, however, there is no new capacity coming up this year. The company’s 3.6-million tonne plant at Satna, Madhya Pradesh, will be complete only by the end of next year.It also plans a 4.8-million tonne capacity in Kurnool, Andhra Pradesh, which is waiting for clearances from the Government.After reporting fall in profit growth for three quarters in a row, Prism Cement reported a 22 per cent growth in net profit in the June quarter. This followed a good 20 per cent growth in sales, which again was a fall-out of better realisations.In the April-June period, prices rose by an average Rs 20-25 in the eastern market and by Rs 6-7 in the northern market compared to the same period last year.As only a volume-driven performance can warrant a sustainable growth, Prism Cement’s slow pace of capacity additions is a dampener on the stock.Prism Cement’s advantages, however, lie in its efficient operations, high margins and debt-free status. Being debt-free, the company can leverage to finance its capex plans.To reduce costs the company has to consider captive power generation, as its new cement kilns (of capacity close to 8 million tonne) commence production. . As of now, there is however no roadmap for this.The company’s operating margin, which fell to a low 19.5 per cent in the September quarter last year has improved consistently over quarters on a fall in coal prices and has come back to last year levels of 45 per cent.Shareholders of Prism Cements can consider booking profits. Though an efficient player, the company may not be able to capitalise on the strong cement demand in the north region, given its capacity constraints. The company’s current installed capacity is just 2.5 million tonnes.Though work on the new plant (3.6 million tonne) has begun, contribution from it will start only towards the last quarter of 2010.Given the capacity-additions that are likely to come up over the next year, the demand-supply equation or pricing picture may not be as rosy at that point in time.The company recorded a 20 per cent increase in net sales in the June ’09 quarter. But this growth was aided by realisation and not volumes, raising questions about sustainability.At a price-to-earnings ratio of 10 times (on trailing earnings of the four quarters), the stock trades at a premium compared to peers such as Binani Cement and Birla Corporation (five-seven times).Our previous recommendation on the stock was a sell, based on concerns of poor demand in the North and intense competition in its region of operation.Though demand has since improved with the increase in government’s stimulus spending, competition remains high.


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