Buy India Cements; target of Rs 110: FinQuest Securities

FinQuest Securities`s research report on India Cements

"India Cements`s- cement dispatches rose 7.3 percent Y-o-Y to 2.78 mn tonnes, while the realization remained under significant pressure. Cement prices in company's major market of Andhra Pradesh remained under severe pressure during the quarter, while other regions like Tamil Nadu and Karnataka also witnessed significant price pressure. The company's gross realization fell 1 percent Y-o-Y (3.5 percent Q-o-Q) to Rs 4213 per tonne, while the net realization (after freight expenses) fell 6.4 percent Y-o-Y (5 percent Q-o-Q) to 3225 per tonnes.”

“The company witnessed severe power shortage in Andhra Pradesh, while it was not allowed to wheel the power it generated in Tamil Nadu for the Andhra Pradesh plant, as per the Tamil Nadu Pollution control board clearance. In Andhra Pradesh the company faces 12 days power holiday in a month and in the remaining days four hours power cut. This caused the power plant in Tamil Nadu to operate at lower capacity utilization, while it had to resort to costlier grid power for its Andhra Pradesh plant. So the power cost remained elevated. Although the company has taken various measures to improve the situation by setting up additional captive power units, the actual fructification would take some time. The company has guided cement volume growth of 6 percent - 8 percent for FY14 and has said that the excess capacity in the southern market would be an overhang and would take another 2-3 years to normalize. We expect the demand to improve ahead of the general elections in 2014 and the capacity utilization would marginally improve during this period. However we believe that the realization would remain under pressure as a result the margins would also remain under pressure, since we believe the operating costs would continue to remain firm due to higher power and fuel expenses and freight cost. We see margin pressure continuing until the coal production from the company's mines in Indonesia accelerates. We estimate the revenue and EPS for FY14 to come in at Rs 52.87 bn (14.6 percent higher) and Rs 10.6 (83.8 percent higher).”

“The company's predominant presence in the southern market is a concern as the demand in some of the south markets still remains poor and in the event of price fall, the southern region will witness sharper correction than any other regions. The cement prices in the Andhra Pradesh market has shot up sharply post the Q4FY13 results although we believe that it is not sustainable. However we maintain our 'Buy' rating on the stock with price target of Rs 110 (EV per tonne of USD 75 - average of the previous five year EV per tonne, PE of 10.4x and EV/EBIDTA of 5.5x FY14E earnings) as the company is the cheapest among the frontlines in terms of asset based valuation. We see cement price falling in the coming months, but growth in volumes will more than compensate for the price fall as the company increases its lead distance to push volumes,” says FinQuest Securities research report. 

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