>HEIDELBERG CEMENT INDIA LIMITED: Favourable Regional Exposure - CAUT of 97%

Heidelberg Cement came out with lower than expected set of numbers on the back of sharp rise in input costs. Although topline increased by 36% YoY & 25% QoQ to INR 2570 mn, HCIL recorded a net loss of INR 18 mn in Q4CY11. Strong demand in Central & western region enabled the company to operate at 97% capacity utlisation levels. Its expansion plans remains on track and HCIL is all set to double its cement capacity to 6 mtpa by H1CY12. We introduce CY13 estimates and maintain a BUY rating on the stock with a target price of INR 61/share.


■ Volume & Realisation driven growth
HCIL reported a revenue growth of 36% YoY & 25% QoQ to INR 2570 mn on the back of 14% YoY increase in sales volumes to 0.74 mn tn (18% QoQ) & 19% YoY improvement in realisations to INR 3450/tn. Volume growth was led by pick up in demand post monsoons, thereby enabling the company to hike prices.


Revenue grew by 14% in CY11 aided by 9% growth in volumes to 2.92 mn tn & 4% improvement in realisations to INR 3361/tn. Going forward we expect HCIL to clock volume CAGR of 29% over CY11 - CY13E led by increased capacity from H2CY12.


■ Favourable Regional Exposure - CAUT of 97%
Robust demand in its key markets of Central & Western India resulted in capacity utilization of ~97% in Q3FY12 as against 74% utilization of cement sector on pan India basis. While pan India cement demand growth was ~6% in 9MFY12, demand remained robust in the Western and Central regions that grew by ~17% and 8% YoY respectively.


■ Cost pressure denting profitability
EBITDA grew at slower than expected pace to INR 65 mn in Q4CY11, due to sharp increase in input costs. Power & Fuel cost increased by 21% YoY to INR 832/tn due to price hikes by Coal India. Freight cost continued to spike up on the back of an increase in diesel prices and railway freight rates. EBIDTA/tn stood at INR 41 as against loss of INR 91 in Q4CY10 & INR 102 in Q3CY11. In addition to increase in operating costs, 13% surge in depreciation expenses resulted in net loss of INR 18 mn in Q4CY11 as against loss of INR 55 mn & INR 82 mn in Q4CY10 & Q3CY11 respectively.



■ Expansion plans on track
Its expansion plans of setting up 1 mpta grinding unit in Damoh (MP) 1.9 mtpa grinding unit in Jhansi (UP) remains on track and are scheduled to go on stream by the end of Q2CY12. It is also setting up a conveyor belt from limestone mines to the clinkerisation unit, which will lead to reduced freight cost. HCIL has already incurred a capex of ~INR 10.5 bn on these plans and will further incur ~INR 0.5-1.0 bn in CY12.


■ '15:15' vision on course
HCIL continues to work on its '15:15' vision wherein it has envisaged being a 15 mt company by 2015. The company is looking at both organic and inorganic route to achieve this target. It has ready buyout targets in some pockets of India and it is currently in talks with them, though nothing has been fructified yet.


Outlook & Valuation
We remain positive on the cement sector and HCIL which has strong foothold in Central & Western India, is well placed to benefit from the growth opportunities in these regions. Increasing cement capacity, higher utilisation levels, parental support from third largest cement company globally, deleveraged balance sheet and superlative return ratios presents attractive investment opportunity. Subsequent to dismal performance registered by HCIL, we have reduced our CY12E EPS estimates to INR 1.31. Further, we have introduced CY13E estimates and maintain our BUY rating on the stock with a target price of INR 61/share. At the CMP of INR 38, the stock trades at CY13E P/BV of 0.9x & PE of 13.3x and EV/tonne of US$42 its CY13E capacity.


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