India Cements - Bottomline much lower than expected; maintain Buy - BRICS

India Cements Limited (ICL) posted disappointing results with adjusted PAT 39% lower than anticipated at Rs.603 mn (estimated Rs.990 mn) maindly due to lower than expected realisations, higher interest charges, and higher effective tax rate. Topline grew a modest 12% yoy while margins improved 137 bps to 19.3%. Prices in key southern markets are remarkably stable despite the oversupply scenario, giving us confidence on the stock's prospectus. Current valuations look attractive at an EV/tonne of US$72; we maintain our Buy rating.

Topline driven by realisations: ICL reported a modest 2% growth in cement and clinker volumes; average realisations were up 11% yoy or Rs.3/tonner qoq (we expected Rs.80) with south prices stable. Substantial declines in IPL and windmill revenues resulted in overall topline coming at Rs.11.6 bn (up 12% yoy) vs. expected Rs.11.8 bn.

Higher realisations offset cost pressures: Power and fuel costs (per tonne) were up 24% due to higher domestic coal prices and purchase of expensive power from exchanges. Freight costs were up 11% as diesel prices, rail freight rates, and lead distances went up. Still, higher realisations offset cost pressures somewhat, leading to a 137 bps expansion in EBITDA margins to 19.3%. ICL's EBITDA/tonne increased to Rs.828/tonne (vs. Rs.701/tonne in Q3FY11). After adjusting for a Rs.66 mn forex gain (non-recurring) and higher-than-expected tax, ICL posted a disappointing PAT of Rs.603 mn, up 11% yoy.

Capex: Commissioned a 25 MW boiler at Sankarnagar (Tamil Nadu) - another 25 MW should commissioned in a couple of weeks. This is likely to lead to a savings of Rs.1/unit for its Tamil Nadu cement plants. We see coal supplies from Indonesia mines beginning in Q2FY13.

Valuation attractive: ICL trades at an EV/tonne of US$72. We still remain bearish on the overall sector due to the impending oversupply situation, but remarkable price stability in the south gives us confidence on the ability of southern players to pass-on cost escalations. Despite these positives, we value ICL at a conservative 30% discount to its replacement cost, to arrive at our target of Rs.106. Maintain Buy.

Source : Equity Bulls

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