Heidelberg Cement - Subdued quarter; rich valuations; downgrade to Hold - Anand Rathi

On lower-than-expected realizations, Heidelberg's EBITDA per ton at Rs.300 came lower than expected. Costs continued to rise, with the major push from an increase in the power tariff. The 2.9m-ton expansion will be commissioned in Nov'12. We downgrade the stock to a Hold due to the rich valuations and restricted upside, and retain our target of Rs.58.

- Realizations were up 18% yoy (down 3% qoq) to ~Rs.3,820 a ton. Volumes rose 5% yoy (and dipped 14% qoq) to 0.67m tons. Realizations dropped on account of the overall drop in cement prices in the Central region. During October, cement prices have ranged between Rs.275 and Rs.300 a bag in the core markets of MP, UP and Bihar and are expected to be firm to high during 4QCY12.

- Costs continue to increase. EBITDA/ton, at ~Rs.300, was better than EBITDA loss of Rs.100 per ton yoy but lower than Rs.480 qoq, chiefly due to the lower realizations and higher costs. Power & fuel costs rose 15% qoq due to the increase in tariffs by the state grid. However, the increasing use of low-cost petcoke has kept fuel cost rises in control. We expect profitability to improve from 4QCY12 led by better prices and additional dispatches from the new unit.

- Expansion on-stream by Nov'12. The expansion of its 2.9m-ton clinker unit at MP is likely to be commissioned by mid-Nov'12, with commercial production to start soon after. The company expects 75% utilisation rate at the new unit in 1HCY13 and 85% from 2HCY13; we have built in a conservative 50%. The conveyor belt to transport raw material (now by truck) is on trial runs and is expected to lower costs by Rs.75-100 a ton. For entire expansion, the company's peak debt would be Rs.9.5bn at an average interest rate of 10.4%.

- Valuation. At our target of Rs.58, the stock trades at 9.2x PE and an EV/ton of US$60 on CY13e. Risk: Price decline, ramp-up delay in new unit.

Source : Equity Bulls

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