India Cements - Continued pessimism forces cut in earnings estimates - Centrum

We revise our earnings estimates downwards by 30.4%/26.6% for FY14E/FY15E due to a) downward revision in volume estimates, b) higher energy and other costs and c) higher interest expense. Rating has hence been brought down to Hold from Buy earlier with the stock valued at 4x FY15E EBITDA against 5x earlier, due to sustained pressure on earnings and return ratios. Continuing demand-supply mismatch in its key Southern market and issues related to the separation of Telangana state will continue to hamper volume growth, making cement prices in the region vulnerable. We suggest a switch to JK Cement which also has a presence in the North region and exposure to the white cement business.

Steep fall in realization impacts operating profits: Revenue of the company increased 3.1% YoY to Rs12.4bn primarily due to 11.3% YoY increase in sales volume to 2.65mt. Realization was down 6.2% YoY to Rs4,188/tonne. Led by steep fall in realization and higher operating costs (up 4.6% YoY due to increase in energy and freight costs), operating profit declined by 31.2% YoY to Rs1.9bn and OPM declined 7.7pp YoY to 15.4%. EBITDA/tonne of cement was down 42.4% YoY to Rs593/tonne.

Lower EBITDA and higher interest cost impact profit: Led by decline in op. profit and higher interest cost, adjusted profit (adjusted for Rs270.5mn forex translation loss against Rs250.2mn in Q1FY13) declined 62.1% YoY to Rs349mn.

Earnings estimates revised downwards due to lower volume and higher energy cost: We have revised EBITDA estimates downwards considering lower sales volume assumptions (10.1mt/10.5mt for FY14E/FY15E against 10.4mt/10.9mt earlier) and higher energy cost/tonne (Rs1,300/Rs1,253 for FY14E/FY15E against Rs1,264/Rs1,223 earlier) due to lower use of pet coke in the quarter. Due to the revision in op. profit our FY14E and FY15E Debt stands revised upwards which will result in higher interest outgo of Rs3.4bn (earlier Rs3.1bn) and Rs3bn (earlier Rs2.7bn) for FY14E and FY15E.


Valuation & Risks: At the CMP, the stock trades at 4.8x FY15E EPS, 3.7x EV/EBITDA and EV/tonne of US$52.6. We downgrade our rating to Hold from Buy due to a) continued pressure on earnings, b) low return ratios and c) controversies related to IPL and d) lack of visibility in volume growth. The key downside risk to our estimates could be lower than expected sales volume and sudden drop in cement price in key markets of the company. The key upside risk could be sudden spurt in cement price and significant savings in energy cost due to coal procurement from Indonesian mines in the future.

Source : Equity Bulls

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