>INDIA CEMENTS (MOTILAL OSWAL)

India Cements’ 3QFY10 results were below our estimates, with EBITDA of Rs1.16b and adjusted PAT of Rs271m, due to a sequential decline of Rs20/bag in realizations and cost inflation of Rs11/bag QoQ.

■ Volumes grew 38% to 2.76mt, driven by commissioning of new capacities. Realizations were Rs3,028/ton, a decline of Rs20/bag.
■ Decline in realizations, coupled with overall cost inflation of Rs11/bag resulted in EBITDA/ton decline of Rs32/bag to Rs21/bag. EBITDA margins declined by 16.6pp QoQ (~10.4pp YoY) to 13.5%.
■ The management indicated that with cement prices recovering current realizations were at 3Q average and Rs10/bag higher than December 2009 exit prices.
■ Expects to announce, within a month, acquisition of a coal mine in Indonesia with reserves of 30mt for US$20m.

Downgrading estimates: We are downgrading our estimates for FY10 by 13.5% to Rs12.9 and FY11 by 31.9% to Rs6.8 to factor in below-estimate results, severe pricing pressure in its key market and a cost push. We factor in sequential improvement in realizations of Rs5/bag in 4QFY10 and a decline of Rs10/bag in FY11 from the FY10 average (flat over 4QFY11).

Valuation and view: With very high operating leverage and relatively high gearing, India Cement would be one of the biggest beneficiaries of improvement in the operating environment in South India. The stock is valued at 16.7x FY11E EPS (fully diluted, ex-treasury stock), 8.5x FY11E EBITDA and US$77/ton (at 15.5mt capacity) in a trough year. Buy with a target price of Rs135.

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