Hold India Cements; target of Rs 122: Religare

Religare's report on India Cements

ICEM reported a below-expected Q1 PAT (Rs 30mn losses vs. RCMLe of Rs 103mn gains) on lower cement profitability (EBITDA/t at Rs 480 vs. RCMLe of Rs 600). However, overall EBITDA-level performance improved QoQ on higher realisations (+6%QoQ) and lower costs. While better realisations in the south (since June) and an improved demand outlook in south would aid ICEM’s operational performance, we believe the stock already factors this in. Maintain HOLD with Sep’15 TP of Rs 122 on limited upside.

Realisations aided by better trade mix, higher prices: Realisation moved up 6% QoQ owing to (1) higher realisations in the south, and (2) higher contribution from the trade segment (at 73% vs. 64% YoY/70% QoQ). In July, average net plant realisations were 7-8% higher than the Q1 average. Cement volumes however remained depressed, falling 3.4% YoY. Overall, a 2% drop in cement sales pushed ICEM’s topline down by 1% YoY. Revenues from IPL jumped 13% YoY to Rs 1.2bn.

Cement EBITDA/t below estimates: Cement EBITDA/t increased Rs 60 QoQ (lower Rs 125 YoY) to Rs 448 (RCMLe: Rs 600) led by better cement realisations and lower costs – a positive surprise given the increase in costs reported by industry players. Power & fuel costs declined due to lower fuel costs (imported coal) and higher captive generation of power. The imported coal component in the fuel mix rose to 80% in Q1 vs. 68% in Q4. Overall, margins at 12.9% (est. 13.8%) were lower 260bps YoY/higher 600bps QoQ. Interest costs jumped owing to processing charges of Rs 90mn stemming from refinancing of existing debts.

"We marginally trim estimates and Sep’15 TP to Rs 122 (earlier Rs 130) set at a 5.5x EV/EBITDA one-year forward. ICEM continues to guide towards limited benefits from its recently-commissioned captive Indonesia mines. While the pick-up in cement prices in South India would boost profitability, we think current valuations (at 5.6xFY16 EV/EBITDA) already factor this in. HOLD", says Religare Capital research report.

For all recommendations, click here

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.

Read More