Buy India Cements; target of Rs 101: Nirmal Bang

Nirmal Bang is bullish on India Cements and has recommended buy rating on the stock with a target of Rs 101 in its August 14, 2012 research report.

“India Cements’ (ICL) 1QFY13 results were better than our estimates at the operating level, with EBITDA at Rs2.77bn (25% higher from our estimate and 14% from Bloomberg estimate). However, translational forex losses of Rs250mn and cost related to IPL (one time as per management) of Rs200mn led to a 39.2% decline in net profit to Rs621mn. Adjusted for one-time cost related to IPL, net profit would have been higher than our estimate by 11.5% at Rs821mn. Following the translation forex loss and one time IPL cost, our earnings estimates have been downgraded by 16% in FY13 and 6.4% in FY14. However, we retain our Buy rating on ICL with a target price of Rs101 based on 4xFY14E EV/EBITDA given the improvement in cement demand, reduction in high-cost power consumption and stress-case valuation.”

“ICL posted net sales of Rs12bn (up 13.7% YoY, 9.3% higher from our estimate and 5.0% from Bloomberg estimate) driven by a marginal improvement in sales volume and robust revenue booking by IPL (Indian Premier League) franchise. Net sales for the quarter include income from IPL of Rs1.22bn (up 44% YoY) and freight income of Rs125mn from shipping business. Cement realisation declined 2.3% YoY to Rs4,466/tn, which was compensated by a 2.9% sales volume growth. The company posted EBITDA of Rs2.77bn (including Rs310mn from IPL, shipping and wind mill businesses), up 14.9% YoY, while EBITDA margin improved 20bps to 23.1% YoY (290bps higher than our estimate). Overall total expenses rose 11% to Rs3,884/tn (up by Rs383/tn), primarily due to higher electricity charges and freight costs. Power and fuel costs rose 17.2% to Rs1,210/tn due to the increase in average electricity costs to Rs4.47/unit from Rs3.90/unit. Freight costs increased 20.3% to Rs937/tn due to higher rail tariff and change in market mix. Interest costs rose 63% YoY due to inclusion of translational forex loss of Rs250mn (US$60mn un-hedged debt) and one-time cost related to IPL player auction of Rs200mn, leading to a 39.2% decline in reported net profit to Rs621mn.”

“We retain our Buy rating on ICL with a target price of Rs101. Our TP is based on EV/EBITDA multiple of 4x FY14E earnings, which is close to the lower end of its historical range over the past seven years. This implies EV/tn of US$60, which is at a 60% discount to replacement costs. Given the improvement in demand, reduction in high-cost power consumption and stress case valuation, ICL provides a good investment opportunity on the risk-reward parameter,” says Nirmal Bang research report.

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