Heidelberg Cement - Subdued quarter; recovery pinned on new capacity; Hold - Anand Rathi

Realizations rose 10% yoy and dipped 3% qoq to ~Rs. 3,810 a ton. Volumes dipped 9% yoy (and rose 3% qoq) to 0.67m tons. The drop in realizations stemmed from the overall drop in cement prices in the Central region. During 1QCY13, cement prices have improved from December lows.

EBITDA loss of Rs. 90/ton. Heidelberg Cement suffered an EBITDA loss of Rs. 90 per ton vs profit of Rs. 310 qoq and Rs. 60 yoy, chiefly due to lower volumes and overall cost pressures. Power & fuel costs rose 37% yoy due to the state grid's tariff increase, chiefly UP. However, the increasing use of low-cost petcoke checked fuel-cost rises. Freight cost also increased, 16% yoy (on the hike in diesel prices and in rail freight). We expect profitability to improve from 1QCY13, led by better prices and cost savings from the commissioning of the new unit. For CY12, the company clocked an EBITDA per ton of Rs. 265, a slight improvement over CY11's Rs. 230.

Capacity at 6m tons during 1QCY13. Grinding capacity in Jhansi, UP, was enhanced from 0.8m tons to 2.7m tons and began commercial production from 16 Jan'13. At Damoh, MP, trial runs have begun at the grinding plant (from 1.2m tons to 2.2m tons) and at the clinker unit (from 1.2m tons to 3.1m tons) and commercial production is expected to start during 1QCY13. After these expansions, cement capacity will stand enhanced to 6m tons.

Our take. On lower-than-expected volumes and higher costs, Heidelberg's reported EBITDA registered a loss of Rs. 90 per ton (we expected a profit of Rs. 250). Costs continued to rise, with the major push from an increase in the power tariff and in freight. Consequent on the disappointing 4QCY12 results, we lower our CY13/14 earnings estimates 36%/23%. We maintain our Hold rating due to the limited upside, and lower our target to Rs. 51 from Rs. 58 earlier. Our target of Rs. 51 is based on 6.5x EV/EBITDA of Jun'14; the implied PE is 8.9x and EV/ton is US$59. Risks: Cement-price decline, or commissioning/ramp-up delay at the new unit.

Source : Equity Bulls

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