India Cements - Demand To Improve On A Depleted Base; Maintain 'BUY' - TP Rs114 - PINC Research

Q3FY12 Result Review – India Cements

Demand To Improve On A Depleted Base

India Cements' (ICEM) results for Q3FY12 were marginally disappointing as below estimate realisations and a MTM forex loss led to PAT of Rs563mn (PINCe Rs593mn). Realisations declined 0.9% QoQ to Rs4.25k/mt (PINCe Rs4.4k/mt). Additionally, lower IPL revenues led to 13.5% QoQ decline in revenues to Rs9.4bn (PINCe Rs10.1bn). Rise in coal cost resulted in a 244bps sequential margin contraction to 20.9% (PINCe 20.3%). Interest charge was inflated due to a Rs137mn MTM forex loss on short term liabilities. Thus, despite a lower tax rate of 9.2%, profits declined 13.5% QoQ to Rs593mn.

- Seasonally weak quarter for volumes, improved outlook
- High coal cost drags down profitability
- Commissioning of power plant to improve profitability

Outlook: With the recent positive trend in dispatches in the Southern region and signs of pickup in demand, we increase FY13 volume estimate by 0.8% to 10.5mn mt. While we have raised FY13 average realisations by ~5%, the increase in power and fuel costs is higher, resulting in a lower margin estimate and 4.5% decrease at EBITDA level. Additionally, increase in interest costs has resulted in a 13% and 17% reduction in FY12 and FY13 estimates to Rs10.2 and Rs12.5 respectively. We introduce FY14 earnings estimate of Rs15.2.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 4.9x FY13 EV/EBITDA. We maintain a 'BUY' recommendation on the stock with a target price of Rs114 (earlier Rs110) discounting FY13E EBITDA 5.5x (earlier 5x). The increase in multiple is to reflect time value and improved demand visibility in the Southern region.

Source : Equity Bulls

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