India Cements - Impacted by unexpected contingencies - PhillipCapital

India Cements (ICL) announced lower than expected earnings for Q2FY13. Cost-push pressures (especially increase in power cost and freight cost) were the key reason for lower than expected operating results of ICL. Though increases in freight costs were largely passed on to consumers, increase in power cost on account of purchase of high cost power in Andhra Pradesh eroded profitability to the extent of Rs430mn. Realisations have stayed firm. We also hosted the Q2FY13 earnings conference call for the company. Following are some of the key takeaways from the results and this call:

- ICL remains cautious and uncertain on demand growth and current scenario in South India. Data unavailability from the representative body of industry - "Cement Manufacturers' Association (CMA)" has made it difficult to review the overall growth of cement consumption on a regional / pan-India basis. However, relying on growth numbers of few majors / leaders, ICL believes the growth rate for the country as a whole for 1HFY13 is not really exciting. Delayed payments for executed projects, slowdown in infrastructure activities and continued slowdown in demand in Andhra Pradesh are some of the key reasons for an uncertain and unpredictable demand scenario, especially in South India.

- South India continues to operate at 6 capacity utilisations. ICL believes the major new projects nearing commissioning are only that of Chettinad Cement and Vicat. Apart from this, no other major projects are likely to take off in the near short term. ICL expects total capacity addition to the tune of 5-5.5mn tonnes p.a. in South India in 2HFY13E.

- Pricing in Andhra Pradesh corrected steeply towards end of August 2012 (by R-70/bag to Rs210-220/bag) and this correction sustained for the whole of September 2012. Since October 2012, prices have recovered in Andhra Pradesh by R-35/bag and very soon they are expected to reach the normal levels of Rs290-300/bag. In other states of South India such as Tamil Nadu (Rs345/bag), Kerala (Rs355/bag) and Karnataka (Rs335-345/bag), pricing remained firm and continues to remain stable. While outlook on pricing in Andhra Pradesh remains hopeful, the outlook provided for other states of the region was opportunistic and every cost-push is likely to be passed on. ICL's exposure to Andhra Pradesh is 1% of its total sales volume in South India.

- Clinker production for ICL was up by 6% YoY and QoQ; and sales volume were by marginal 2% YoY; 4% QoQ. Net Plant Realisations (NPRs) improved by Rs100/tonne YoY; on sequential basis NPRs corrected marginally by Rs.20/tonne.

- At Trinetra Cement (61.22% Stake; subsidiary of India Cement in North India) the performance registered a significant improvement on YoY basis. While the sale volume improved by 1 YoY; the realisations improved almost 40% YoY. Trinetra Cement reported an EBITDA of Rs155mn against EBITDA loss of Rs60mn YoY.

Valuation & Price Target

We have valued ICL at 5.5x EV/EBITDA on FY14E earnings. We strongly believe, given the size of capacity of ICL and being a regional leader of South India, ICL deserves better valuation multiples.

At CMP of Rs93, stock of ICL trades at 9.0x and 6.4x PER; 5.3x and 4.0x EV/EBITDA and US$59 and 54 EV/tonne on FY13E and FY14E earnings, respectively.

At our price target of Rs131, stock of ICL will trade at 12.7x and 9.0x PER; 7.0x and 5.5x EV/EBITDA and US$78 and 74 EV/tonne on FY13E and FY14E earnings, respectively.

Source : Equity Bulls

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