India Cements - Higher energy costs lead to lower op. margins - Centrum

India Cements' Q2FY13 result was below estimates with EBITDA at Rs2.1bn (vs. est. Rs2.2bn) and op. margin at 18.3% (vs. est. 20.1%). Lower EBITDA was primarily due to higher energy cost as the Andhra Pradesh grid declared a power holiday for 12days/month. High power cost due to power cut led to ~Rs160/tonne YoY (and Rs65/tonne QoQ) increase in energy cost. Lower EBITDA and higher interest cost (9.9% QoQ increase) led to adj. profit of Rs420mn (vs. est. Rs621mn). The management expects the power cut from Andhra Pradesh grid to continue in 2HFY13E which will result in higher energy cost. Considering this, we have revised our EPS downwards by 10.8% to Rs9.1 for FY13E. Going forward with the commissioning of the power plant in Andhra Pradesh and stabilization of Tamil Nadu plant the company will get some respite from higher energy costs in FY14E. Going forward, we expect EPS to grow at a CAGR of 19.2% between FY12-FY15E. RoE of the company is expected to improve to 10.1% by FY15E against 6.9% in FY12 (RoE was 1.9% in FY11). We maintain Buy on the stock with a target price of Rs122, upside of 25% from CMP.

Higher realization and sales volume lead to higher revenues: Revenue of the company increased 3.1% YoY to Rs11.2bn (est. Rs10.9bn) driven by a) 4.4% YoY increase in cement realization to Rs4,408/tonne (est. Rs4,377/tonne) and b) 2.3% YoY increase in cement sales volume to 2.48mt (est. 2.38mt). Revenue from IPL was at Rs52mn against Rs515mn in Q2FY12 as last year the company received IPL revenues in two tranches.

Higher costs lead to decline in op. profit and margin: Operating cost for the Cement division increased 7.5% YoY to Rs3,588/tonne due to an increase in energy and freight costs. Energy cost increased Rs205/tonne YoY (and Rs113/tonne QoQ) led by a) increase in power cost in Tamil Nadu and Andhra Pradesh SEBs, b)12 day/month power cut by Andhra Pradesh grid and c) increase in domestic coal price. Freight cost increased 14% YoY to Rs901/tonne led by increase in diesel price and railway freight rates. EBITDA loss from IPL was at Rs55mn against profit of Rs328mn in Q2FY12. EBITDA declined 18.6% YoY to Rs2.1mn and EBITDA margin declined 4.9pp YoY to 18.3%.

Lower EBITDA and increase in interest and depreciation costs lead to lower adjusted profit: Interest cost (adjusted for foreign exchange items) of the company increased 17.9% YoY (and 9.9% QoQ) to Rs769mn due to a rise in loans as the company acquired a ship during the quarter. Depreciation was up 11.6% YoY to Rs699mn. Decline in EBITDA coupled with higher depreciation and interest cost led to 51.2% YoY decline in adj. profit to Rs420mn. Foreign exchange gain was at Rs101.7mn against loss of Rs243.5mn in Q2FY12 (and Rs250.2mn in Q1FY13).

Earnings estimates revised downwards: We have revised our earnings estimates downwards by 10.8%/2.5% to Rs9.1/12.3 for FY13E/FY14E. Decline in FY13E is primarily due to higher energy cost in 2HFY13E as the management expects the power cut in Andhra Pradesh to continue till 2HFY13E.

Maintain Buy on attractive valuations: At the CMP, the stock trades at 7.9x FY14E EPS, 4.4x EV/EBITDA and EV/tonne of US$73.4. The company will also benefit from the commissioning of power plants and coal procurement from its mines in Indonesia. We maintain Buy on the stock with a price target of Rs118.

Source : Equity Bulls

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