India Cements - Result beats estimates; maintain Buy - Centrum

India Cements' Q3FY13 result was above our and Bloomberg consensus estimates with op. profit at Rs1,927mn (vs. est. Rs1,637mn) and op. margin at 17.8% (vs. est. 16.3%). Higher op. profit was primarily due to a) higher sales volume of 2.41mt (vs. est. 2.29mt) and higher cement realization at Rs4,373/tonne (vs. est. Rs4,275/tonne). The company benefitted from sequential decline in cost of power (Rs7/unit against Rs9/unit) sourced from outside and stabilization of Sankar Nagar, Tamil Nadu power plant which led to 6% QoQ decline in variable cost during the quarter. Higher op. profit resulted in adj. profit (adjusted for Rs111.3mn towards loss on account of foreign exchange fluctuation) of Rs339mn (vs. est. Rs223mn). The management expects the power cut from Andhra Pradesh grid to continue in Q4 and Q1FY14E which will impact power cost. Apart from that, AP SEB (State Electricity Board) has proposed to increase the power price to Rs5.5/unit against Rs4/unit, which will impact power price till the power plant of 50MW gets commissioned in AP by Q1FY14E-end. Considering this, we have revised our EPS downwards by 9.1%/5.6% to Rs8.3/Rs11.6 for FY13E/FY14E. The first shipment of 40,000 tonnes of coal from Indonesian coal mine has been received and currently lies at the jetty. It will reach the plant within 2 weeks. The management indicated that this will be used for the Tamil Nadu power plant in the initial period and then for AP power plant, when it gets commissioned. The management indicated that cement sales volume in January '13 was at 0.88mt against 0.78mt in January '12. Going forward with the commissioning of the power plant in Andhra Pradesh the company will get some respite from higher energy costs from Q2FY14E. Going forward, we expect EPS to grow at a CAGR of 18.2% between FY12-FY15E. RoE of the company is expected to improve to 9.9% by FY15E against 6.9% in FY12 (RoE was 1.9% in FY11). We maintain Buy on the stock with a target price of Rs108, upside of 35% from the CMP.

Higher realization and sales volume lead to higher revenues: Revenue of the company increased 15% YoY to Rs10.8bn (est. Rs10bn) driven by a) 3% YoY increase in cement realization to Rs4,373/tonne (est. Rs4,275/tonne) and b) 10.5% YoY increase in cement sales volume to 2.42mt (est. 2.29mt). Revenue from IPL/Shipping /Wind-mill was at Rs90/Rs147.9mn/Rs25mn against Rs40mn/Rs100mn/Rs0.87mn in Q3FY12.

Higher costs lead to decline in op. profit and margin: Operating cost for the Cement division increased 5.6% YoY to Rs3,571/tonne due to 25.5% YoY increase in freight cost led by increase in diesel price and railway freight rates. EBITDA loss from IPL was at Rs88mn against profit of Rs16mn in Q3FY12. EBITDA from Shipping was at Rs78mn against Rs40mn in Q3FY12. EBITDA declined 1% YoY to Rs1.9bn and EBITDA margin declined 2.9pp YoY to 17.8%.

Lower EBITDA and other income coupled with higher tax rate and depreciation impact profits: Depreciation was up 13.8% YoY to Rs708mn. Other income declined 26.6% YoY to Rs34mn against Rs46mn in Q3FY12. Tax rate during the quarter was at 31.2% against 9.2% in Q3FY12. Adjusted profit declined 39.8% YoY to Rs339mn.

Earnings estimates revised downwards: We have revised our earnings estimates downwards by 9.1%/5.6% to Rs8.3/Rs11.6 for FY13E/FY14E considering higher energy cost till Q1FY14E.

Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.9x FY14E EPS, 4x EV/EBITDA and EV/tonne of US$66.8. The company is expected to benefit from the commissioning of power plant and coal procurement from its mines in Indonesia. We maintain Buy on the stock with a price target of Rs108.

Source : Equity Bulls

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