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Research
India Cements - Cement Sector Update - Karvy
Posted On : 2013-12-29 20:15:11( TIMEZONE : IST )
FY14 sales volume to decline ~1% YoY: We expect India Cements' profit decline trend to continue in 3QFY14 on account of weak demand in Tamil Nadu during the quarter (sand non availability), Telangana related agitation in Andhra Pradesh as well as low demand due to the monsoon impact in the southern region. Subsequently, we expect its FY14E volumes to decline by 0.6% while we factor in 5% YoY volume growth in FY15E.
Return ratio sinking to low single digit: With a total of its 100 MW now commissioned and stabilized, India Cements should be able to source 60-70% of its power requirement internally. This should moderate its opex per MT increase to a modest 1% YoY in FY14E. Factoring in the weak 1HFY14 and expected profit decline during 3QFY14, we estimate India Cements' EBITDA to decline 10% YoY in FY14E. We estimate 15% YoY growth in FY15E as we factor in demand recovery in FY15E. With higher capital charges and investments in non–profit making subsidiary, its FY14E PAT should decline 20% YoY and its RoE should contract to low single digit 3.7%.
Trinetra sale can lead to value unlocking for India Cements: The stock of India Cements has recently run-up on anticipation of India Cements selling off its 61% stake in Trinetra Cement (1.5 mn MT). India Cements has invested ~Rs7bn (~40% of its current market cap) but it is not receiving any cash flow from the same as Trinetra is currently loss making. Hence, if India Cements is able to sell off this subsidiary at around USD100-120 per MT valuations, the cash will reduce its debt & interest outgo and should also improve its return ratios by 300-400bps leading to re-rating in the stock. With large scale capacity expansion already happening in Rajasthan during FY13-16E, this sell off may take have to await strong demand recovery in the northern region, in our view.
Valuation & Recommendation: We maintain our "SELL" recommendation on the stock with a TP of Rs47 valuing its standalone cement business at 4.2x FY15E EBITDA (Rs44 per share) and its 61% holding in Trinetra Cement at USD60 per MT (Rs3 per share).
