Accumulate India Cements; target of Rs 122: Emkay

Emkay's research report onIndia CementsIndia Cements’ operating performance was marginally ahead of our estimates with EBITDA at Rs 2.1bn (+16.1% yoy) against our estimate of Rs 2.0bn mainly led by lower-than estimated freight cost (Rs946/tn vs. est. Rs980/tn). EBITDA/tn was at Rs 840 (Rs 831/Rs 730 in Q4FY15/Q3FY16) against our estimate of Rs 779/tn. Sales volume grew significantly by 18.3% yoy/27.9% qoq to 2.5mt led by strong demand in Telangana/Andhra Pradesh. In Telangana/AP, cement demand was up 40% yoy during Q4. Realization/tn declined 4.3% yoy to Rs 4,597/tn (vs. est. Rs 4,557). Opex/tn was down 5.4% yoy led by 20% yoy decline in energy cost. Decline in energy cost was led by higher usage of petcoke (34% in Q4 against 18%/25% in Q2/Q3FY16) and lower imported coal prices. Freight cost/tn was down 4.6% yoy/5.8% qoq which in our view is primarily due to higher sales volume in Telangana/AP markets (near to the plants). Attractive valuation at 6.1x/4.6x FY17e/FY18e EV/EBITDA should restrict downside in the stock, in our view. The company had repaid debt of Rs 2.7bn in FY16 and hence, offers comfort on our assumption of debt reduction. Demand recovery in AP/Telangana would help volume growth and savings in freight costs.

Sustenance of cement prices at higher levels in the South region despite low demand and prospects of demand recovery in AP/Telangana markets bode well for the company. Though, there was a decline of Rs 100/bag between Jan-Mar ‘16 in cement prices in Andhra Pradesh, the prices have again started improving. Current valuations at 6.1x/4.6x FY17e/FY18e EV/EBITDA offers comfort and we believe that risk-reward is favorable. We upgrade our rating to Accumulate from Hold revised PT of Rs 122 (earlier: Rs 98).