Heidelberg Cement India - 2QCY2013 Result Update - SPA Securities

HCIL reported mixed set of numbers in the last quarter with its topline and operating profit growing in line with estimates, however net profit lagged estimates largely due to higher capitalization charges post expansion. Topline grew by 17.6% to INR 3586 mn driven by 22.0% growth in cement sales volumes to 0.94 mt led by incremental production from expanded capacity. 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 22.0% growth in sales volumes (-1.1% QoQ) to 0.94 mt in the last quarter entirely due to commencement of new facilities in Central India. Shortage of labour in May 2013 in addition to heavy monsoons in its key market of MP (60-80% above normal which is the highest in the last 10 years) limited the volume growth. Demand continues to remain muted across the country as a result of which overall realisations declined by 3.6% YoY (1.8% QoQ) to INR 3818/tn. This resulted in a topline growth of 17.6% to INR 3586 mn in Q2CY13.

17% decline in EBIDTA/tn

EBIDTA/tn declined by 17.0% to INR 426 due to 3.6% decline in realisations as total expenditure/tn remained flat at INR 3480. Raw Material expenses declined by 16.5% to 851/tn while Freight expenses rose by 15.0% to INR 604/tn due to increase in diesel prices and higher railway freight rates. Power & fuel costs surged 9.4% YoY to INR 1103/tn due to increase in grid power tariff and higher coal prices. Power tariffs in most states have surged (UP 44%, Maharashtra 24%, MP 7.5% and Karnataka 5.5%) in the current year.

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 month. This expansion is well timed as it will enable the company to increase its market share and enjoy the economies of scale. HCIL is selling the additional output in the markets of UP, MP and Bihar which are growing at ~9% and has utilization of more than 90%. Also this new capacity is more efficient and requires less consumption of power and fuel (reduction in consumption of power by 8 units/tn leading to a savings of 10% on power cost).

~INR 80/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 in MP, the benefits of which will be largely seen after stabilisation from the current quarter onwards. This is expected to result in overall savings of ~INR 80/tn in transportation cost.

Disinvestment of Raigad Unit

HCIL has recently approved to divest its 0.7 mt cement grinding unit at Raigad on a slump sale basis to JSW Group. Cost of production at this unit is high as it buys clinker from open market. We have not taken this into our consideration as the valuation of the deal has not been disclosed till date and currently both the parties are negotiating and finalizing the terms of agreement.

Outlook & Valuation

Increasing presence in high growing central market (MP & UP) coupled with doubling of cement capacity promises bright outlook for the company. We expect profitability to improve due to economies of scale, ~8 units/tn reduction in power consumption, increased usage of pet coke (from 37% to 50%), commissioning of conveyor belt (resulting in savings of ~INR 80/tn) and sale of inefficient plant.

With majority of capex plans almost over, return ratios are expected to improve. We change our estimates to factor in higher capitalization charges post expansion and 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 0.90x & PE of 11.22x and EV/tonne of INR 2660 its CY14E capacity.

Source : Equity Bulls

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