India Cements - Long-term positives to override short-term concerns; maintain Buy - BRICS

- Pressure on power costs likely to ease from Q1FY14 onwards

- Sharp scaling down of capex plans by ICL to result in positive free cash flow in FY14

- Lowering EPS estimates for FY13 and FY14 by 35% and 37%

- Stock's valuation seem attractive; Raise TP to Rs120, maintain BUY

Weakness in AP prices an aberration; power situation to improve from Q1FY14: Cement prices in AP witnessed an unexpected correction in the monsoon, after exhibiting remarkable stability over last two years. However, since prices have already recovered to their all time highs, we believe the correction was an aberration. ICL also saw a sharp increase in power costs in Q2, with APGENCO enforcing a 12-day supply holiday, thus forcing the company to buy expensive power. While the power shortage is likely to continue, ICL should benefit once its captive power plant in AP and its Indonesian mines are commissioned in Q1FY14.

Interest burden likely to reduce: While ICL's debt levels remain high, the scaling down of its capex plans should result in interest cost savings in FY14. ICL has debt of about Rs30bn, out of which, Rs6.1bn is non-interest bearing. We expect free cash flow to turn positive in FY14.

Revising EPS estimates: We have lowered our FY13 and FY14 EPS estimates by 32% and 37%, to account for higher than expected power costs. We have lowered our estimated growth in realization for FY14 from 5% to3%, as oversupply is likely to persist. We have lowered our estimated volumes for FY13 and FY4 by4% each, given the continued lacklustre demand in the south.

Valuation attractive; raising TP: At its current price, ICL is valued at an EV/tonne of US$70, which is at a significant discount of 44% to replacement cost. While power costs will remain a concern over the next two quarters, the better outlook for FY14 still does not justify the current valuation. Nevertheless, we value ICL at a conservative 35% discount to replacement cost to arrive at our TP of Rs120. Maintain BUY.

Source : Equity Bulls

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