Heidelberg Cement India - Q1CY2013 Result Update - SPA Securities

HCIL reported steady set of numbers with sharp improvement in operating performance compensating for surge in interest and depreciation expenses post expansion. While the topline & EBDITA grew by 29.4% & 40.5% YoY respectively in Q1CY13 led by incremental production from expanded capacity, bottomline declined sharply by 80.8% on the back of 6.8x increase in interest expenses & 2.2x surge in depreciation expenses. Stabilisation of newly commissioned 2.9 mt capacity & new conveyor belt system will drive the profitability of HCIL going forward. We retain our BUY rating and target of INR 54 on the stock.

Incremental capacity driving volumes

HCIL reported 20.7% growth in sales volumes (+40.9% QoQ) in the last quarter entirely due to commencement of new facilities in Central India. HCIL sold 0.23 mt of cement from this new unit and excluding this, volumes would have declined by 7.9% YoY reflecting sluggish cement demand. This sharp increase in volumes coupled with 7.2% improvement in realisations resulted in a topline growth of 29.4% YoY to INR 3693 mn in Q1CY13.

Sharp improvement in operating performance

EBIDTA/tn improved by 16.4% to INR 394 led by increased volumes coupled with 5.7% increase in operating cost as against 7.2% improvement in realisations. Power & fuel costs surged 18.3% YoY to INR 1178/tn due to increase in grid power tariff and higher coal prices over the last calender year. Freight expenses rose 21.5% to INR 621/tn due to increase in diesel prices and higher railway freight rates.

New capacities commenced operations

HCIL's additional clinker & grinding capacities of 1.9 mtpa & 2.9 mtpa (increased to 3.5 mtpa & 6 mtpa respectively) had started commercial production from January 13 onwards and are expected to stabilize over the next few months. The new capacity is much more efficient thereby leading to ~10 units/tn reduction in consumption of power & fuel (4% decline in P&F cost/tn) and will also enable the company to enjoy higher economies of scale. We therefore expect the EBITDA/tn to increase from INR 267/tn in CY12 to INR 573/tn over CY12-CY14E.

The company plans to sell the additional output in the markets of UP, MP and Bihar. It has already increased its revenue share in Central India from 69% in CY12 to 75% in Q1CY13 and further targets to increase it to ~82% by the next year.

~INR 100/tn savings to flow from new conveyor belt

HCIL has also commissioned its 20 km long new conveyor belt (one of the longest in the Country) for transportation of limestone from mine to its plant, the benefits of which will be largely seen after stabilisation from the next quarter onwards. This is expected to result in overall savings of ~INR 100/tn in transportation cost.

Outlook & Valuation

Despite the sluggish cement demand over the past few months, presence in high growth central region of UP & MP places HCIL on a superlative growth path. Doubling of cement capacity, increased usage of pet coke from 37% to 50% and usage of conveyer belt (savings of ~INR 100/tn) will lead to economies of scale. With majority of capex plans almost over, return ratios are expected to improve. We retain our BUY rating and target of INR 54 on the stock based on FY14E EV/tonne of INR 3300. Currently the stock is trading at CY14E P/BV of 0.93x & PE of 8.2x and EV/tonne of INR 2828 its CY14E capacity.

Source : Equity Bulls

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