India Cements crafts turnaround strategy

Why is India Cements making losses?

India Cements has for long been the flagship company of the high-profile N Srinivasan, the man who also owns the Chennai Super Kings IPL team. However, the performance of his core business of cement (India Cement) has been far from flattering. In Q4FY23, India Cements had reported a net loss of Rs218 crore; a nearly 9-fold widening of the loss on yoy basis. Much of this loss can be attributed to a sharp spike in prices of raw materials like coal, pet coke, power, and freight costs. Packaging costs have also taken a toll on the India Cements numbers. Now, the company has embarked on a full-fledged turnaround strategy; despite tough times for the cement industry overall.

What does the turnaround strategy entail?

The approach to a turnaround would be a mix of operational measures and balance sheet measures. To begin with, the company would look to hive off and monetize some of its non-core assets. That will not only release locked-in capital but also make available cash for the core business. That is at the balance sheet level. At an operational level, India Cements plans to refurbish some of its old factories with a view to increasing efficiency. This would be done by attaining lower costs of operations and improving break-even economics. The results are expected to manifest quickly. India Cements is expected to break even in Q1FY24 and turn profitable in subsequent quarters.

Input costs and impairments did the damage

If one looks at the fourth quarter numbers, raw material costs were a key factor in the company dipping into a loss. There was a sharp spike in costs across coal, pet coke, power, freight, and packaging. All these constitute a very large chunk of operating costs and dented profits in the quarter. In addition, India Cements also provided an additional Rs114 crore towards the one-time impairment of certain investments and advances. This only accentuated the loss on top of the operational constraints. That is expected to improve with global commodity prices coming down rapidly.

How will India Cements handle the balance sheet?

Monetizing its non-core assets is one of the major plans that India Cements has in mind. It will sell 600 acres of land which India Cements owns in Tirunelveli district, Tamil Nadu for a consideration of approximately Rs1,300. This cash infusion would be used to repay Rs500 crore of debt during the year, which is nearly one-sixth of the company’s total debt. That is likely to improve the coverage and solvency ratios of the company. Overall, the company has around 26,000 acres of land at its various manufacturing facilities and it is yet to work out how to monetize these.

But some challenges still remain

South has generally been a difficult market compared to the North and West markets. India Cements is currently operating at 72% capacity utilization and must take it to 80% to be profitable on a sustained basis. If the capacity utilization can be managed, then the company is comfortable even without price hikes. Also, several large groups have been on the prowl to buy out smaller cement plants and India Cements with its 16 MTPA capacity is a ripe candidate. For now, Srinivasan has no intentions of selling, but you have to wait and see. 

One thing that India Cements would be also looking at is to monetize the brand built by the Chennai Super Kings IPL team. It remains one of India's most popular and successful franchises over the last 15 years and some brand extension would surely help India Cements. Cement brands leveraging the CSK brand already account for 6% of cement sales, which could be the group's dark horse. 

Content Source: Financial Express