Hold India Cements target of Rs 103: Emkay

Emkay Global Financial Services has recommended hold rating on India Cements with a target of Rs 103, in its November 6, 2012 research report.

“India cements disappointing performance continues with 2QFY13 EBITDA at Rs2.05bn declining by 19% yoy and 26% qoq, significantly below our (Rs2.55bn) and street estimates as higher energy costs impacted profitability of cement segment. P&F costs at Rs1325/t increased 18.5% yoy and 9.6% qoq primarily led by- High cost power at AP plants caused by hefty power holiday of 12 days per month in the state of AP. Increased electricity tariffs in Tamil Nadu and Andhra Pradesh impacting electricity costs which increased to Rs5.14/unit (vs Rs4.47/unit in Q1FY13 and Rs3.4/unit in Q2FY12). Lower power production at Sankar Nagar, Tamil nadu (9.4mn units vs quarterly average of 25mn units) and This led to 8.5% increase in total costs per ton to Rs3590 dragging EBITDA/t below estimates to Rs821/t (vs estimates of Rs940/t), -10% yoy and -21.4% qoq. Further IPL franchise reported an EBIDTA loss of Rs40mn this quarter.”

“Apart from poor operating performance, India cement’s balance sheet also deteriorated as debt increased by Rs4bn in the current quarter resulting in 10% qoq jump in interest costs to Rs767mn (net of foreign exchange gain of Rs100 mn on account of outstanding unhedged forex balances of USD 60 mn). Lower than estimated operational performance and higher interest costs have resulted in APAT of Rs391mn (-44% yoy) significantly below estimates of Rs778mn. India Cements P&F costs this quarter increased sharply as the company failed to benefit from its Sankar Nagar (Tamil Nadu) CPP while power shortage scenario in AP added to its already heavy costs burden. Though the management remains confident about the Sankar Nagar plant operating at full load from Q3FY13E resulting in cost savings, continued power cuts in AP and fuel contracts at higher costs would continue to keep its energy cost elevated. Further the advantage of Indonesian coal would not accrue to the standalone account as coal would be transferred at prevailing market price with the profitability accounted in its Indonesian subsidiary. Adjusting for this higher cost structure, we downgrade our EBITDA estimates for FY13E/14E by 3.4%/2.8%. However, higher interest costs due to incremental debt (~Rs4bn) taken by the company has led to higher downgrades in our EPS estimates for FY13E/14E by 6.1% /3.6%.”

“Though the stock has unperformed the cement universe by a wide margin, we believe that current valuations at EV/E 5.8X leave little upside considering the dismal profitability, increasing leverage, & sub-optimal return ratios (RoCE-9.4%, RoE-6.5% amongst lowest in our cement coverage). Though our TP implies upside, core biz value at Rs92 leave limited room for stock performance. Maintain HOLD,” says Emkay Global Financial Services research report. 

Institutional holding more than 40% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More