Heidelberg Cement India - SPA Securities

Heidelberg Cement came out with tepid set of numbers for the quarter ended Mar 12. While the topline was almost in line with our estimates at INR 2842 mn (up 5% YoY), net profit was above our expectations at INR 114 mn mainly due to sharp decline of 17% in other expenses to INR 549/tn. EBIDTA margin declined significantly from 15.0% in Q1CY11 to 8.2% in Q1CY12. Strong demand in Central & western region enabled the company to operate at almost full capacity utilisation levels and record a volume growth of 7% QoQ to 0.80 mt. HCIL's expansion plan to double its capacity to 6 mtpa has been delayed by couple of months and is now scheduled to come up by Aug 2012. We have tweaked our estimates to factor in increasing freight & power cost and retain our BUY rating on the stock with a revised target of INR 50/share.

Volume & Realisation driven growth

HCIL reported a revenue growth of 11% QoQ to INR 2842 mn on the back of 7% QoQ increase in sales volumes to 0.80 mt & 3% improvement in realisations to INR 3557/tn. Volume growth was aided by improving rural demand and sharp pick-up in construction activities across regions, thereby enabling the company to hike prices. Going forward we expect HCIL to clock volume CAGR of 29% over CY11 - CY13E led by increased capacity from Sept 2012.

Sequential improvement in margins

EBITDA grew sharply by more than 4x QoQ to INR 266 mn in Q1CY12, due to higher realisations coupled with sharp decline of 35% in other expenses to INR 549/tn. Power & Fuel cost increased by 18% QoQ to INR 980/tn due to price hikes by Coal India. Freight cost continued to spike up on the back of ~20% increase in railway freight rates. The raw material cost (after stock adjustments) remained under check at INR 964/tn. EBIDTA/tn stood at INR 290 as against INR 41 in Q4CY11 & INR 497 in Q1CY11. In addition to lower operating expenses, ~10% decline in depreciation expenses resulted in net profit of INR 114 mn as against net loss of INR 18 mn in Q4CY11.

Expansion plans delayed by couple of months

Its expansion plans of setting up 1 mpta grinding unit in Damoh (MP) & 1.9 mtpa grinding unit in Jhansi (UP) is delayed by coupled of months due to shortage of labour and is now scheduled to go on stream by August 2012. It is also setting up a conveyor belt from limestone mines to the clinkerisation unit, which will lead to reduced freight cost. HCIL has already incurred a capex of ~INR 11.5 bn on these plans and will further incur ~INR 0.5 bn - 1.0 bn in CY12.

'15:15' vision on course

HCIL continues to work on its '15:15' vision wherein it has envisaged being a 15 mt company by 2015. The company is looking at both organic and inorganic route to achieve this target. It has ready buyout targets in some pockets of India and it is currently in talks with them, though nothing has been fructified yet.

Demand to ease in near term

Although we expect the industry growth volumes to remain strong till June given the low base of last year, our view is in sync with the management view that underlying demand momentum will ease in the near term due to slowdown in the construction activity in the pre monsoon period. Overall we expect a demand growth of 8% in FY13 in line with company growth estimates.

Outlook & Valuation

We remain positive on the cement sector and HCIL which has strong foothold in Central & Western India, is well placed to benefit from the growth opportunities in these regions. Increasing cement capacity, higher utilisation levels and parental support from third largest cement company globally presents attractive investment opportunity.

At the CMP of INR 29, the stock trades at P/BV of 0.8x & EV/EBIDTA of 6.2x its CY13E earnings and EV/tonne of $32 its CY13E capacity. We have tweaked our estimates to factor in increasing freight & power cost and retain our BUY rating on the stock with a revised target of INR 50/share. At our target price, the stock would trade at an EV/tonne of $50.

Source : Equity Bulls

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