Buy India Cements; target Rs 114: PINC Research

“India Cements’ (ICEM) results for Q3FY12 were marginally disappointing as below estimate realisations and a MTM forex loss led to PAT of Rs 563mn (PINCe Rs 593mn). Realisations declined 0.9% QoQ to Rs 4.25k/mt (PINCe Rs 4.4k/mt). Additionally, lower IPL revenues led to 13.5% QoQ decline in revenues to Rs 9.4bn (PINCe Rs 10.1bn). Rise in coal cost resulted in a 244bps sequential margin contraction to 20.9% (PINCe 20.3%). Interest charge was inflated due to a Rs 137mn MTM forex loss on short term liabilities. Thus, despite a lower tax rate of 9.2%, profits declined 13.5% QoQ to Rs 593mn.”

“With monsoon season in parts of Southern India, the current quarter is seasonally weak for the company. In Q3FY12, volumes declined 8.7% QoQ to 2.18mn mt. On a YoY basis although the volume growth was at a meagre 4.3%, cement dispatch growth in the months of Nov and Dec’11 was encouraging at 15% plus. While a part of this growth is attributable to a low base, the management indicated some signs of pick up in demand from key state of Andhra Pradesh (AP). In addition to the decline in realisations, coal costs rose ~5% sequentially to Rs 6.6k/mt. With disruptions in domestic coal supply, the mix changed in favour of high cost imported coal resulting in a spike in coal cost in-line with estimates. However, with no expenditure incurred on account of IPL during the quarter, other expenditure declined 20% QoQ to Rs 1.24bn (PINCe Rs 1.5bn). This enabled the company post margins of 20.9%, 54bps outperformance to our estimate. EBITDA/mt declined 15.2% QoQ to Rs 903 (PINCe Rs 937). The company has started trial runs at 50MW power plant in Tamil Nadu (TN). The management indicated a saving of Rs 1/unit from the captive plant on the existing tariff and with the proposed increase in electricity rates, an additional benefit is expected. Capex over the next two years is expected at Rs 5bn including another 50MW plant in AP.”

“With the recent positive trend in dispatches in the Southern region and signs of pickup in demand, we increase FY13 volume estimate by 0.8% to 10.5mn mt. While we have raised FY13 average realisations by ~5%, the increase in power and fuel costs is higher, resulting in a lower margin estimate and 4.5% decrease at EBITDA level. Additionally, increase in interest costs has resulted in a 13% and 17% reduction in FY12 and FY13 estimates to Rs 10.2 and Rs 12.5 respectively. We introduce FY14 earnings estimate of Rs 15.2. The stock is currently trading at 4.9x FY13 EV/EBITDA. We maintain a ‘BUY’ recommendation on the stock with a target price of Rs 114 (earlier Rs 110) discounting FY13E EBITDA 5.5x (earlier 5x). The increase in multiple is to reflect time value and improved demand visibility in the Southern region,” says PINC Research report.

Public holding more than 90% in Indian cos

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