>INDIA CEMENTS (EDELWEISS)

■ Clinker sales help maintain revenues; PAT marginally below estimates
India Cements (ICEM) posted net profit of INR 1,369 mn in Q2FY10, which was below our expectation of INR 1,514 mn. While clinker sales (10% of total volume) aided revenues, PAT was marginally below estimates. Pure cement realisations declined by ~INR 6.5/bag (3.5% Q-o-Q). Blended EBITDA/tonne stood at INR 1,034, down 14% Q-o-Q and 16% Y-o-Y.

Average imported coal cost/tonne for the quarter corrected to ~USD 83 from USD 88 in Q1FY10. However, cost has inched up and is at USD 88/tonne currently. While power cost has come down to ~INR 3.4 compared to ~INR 3.7/unit in Q1FY10 (due to power shortage in Andhra Pradesh), it continues to be above FY09 average cost of INR 3.1/kwh.

■ Pricing situation precarious in AP; expected to stabilise going ahead
The management highlighted that prices in Andhra Pradesh (accounting for 20% of total sales) have corrected to INR 157/bag (ex-dealer commission) compared to INR 210/bag in April 2009. We believe, despite sales mix adjustment, full impact of price corrections in Q2FY10 is yet to be reflected due to the timing of price cuts. While all India prices are down ~3% Y-o-Y, prices in South are down ~9.5% Y-o-Y.

MUTED PERFORMANCE

■ Acquisition of coal mine in the offing; 50 MW CPP likely by March 2011
The company guided that it is looking at acquiring an Indonesian coal mine for USD 20 mn. Estimated reserves are 30 MT with calorific value of ~5,800 kcal/tonne. Average FOB cost is likely to be USD 40-45/tonne. Also, of the proposed 100 MW (2x50MW) CPP addition in Andhra Pradesh and Tamil Nadu, ICEM has placed orders for Phase-I – 50MW in Tamil Nadu and it is likely to come on stream by March 2011.

■ Outlook and valuations: No positive triggers in sight; maintain ‘REDUCE’
We are marginally revising our FY11 PAT estimates down 6.2% to factor in muted realisations. At CMP of INR 111, the stock is trading at EV/tonne of USD 79 and USD 72 for FY10E and FY11E, respectively. We remain cautious on the southern region since it is likely to account for ~50% all-India additions in FY10E, with bulk of the capacity being added by smaller players. Further, costs are likely to inch up going ahead resulting in declining profitability. Hence, we maintain our ‘REDUCE’ recommendation. On relative basis, the stock is rated ‘Sector Underperformer’.

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