Tuesday, February 7, 2012


Operating results in-line, lower tax rate boosts PAT

India Cements’ Q3FY12 results were in-line with our estimates on operational parameters with Revenues at Rs9.4bn, 1.1% below our estimates of Rs9.5bn and EBITDA at Rs1.9bn, 2.8% below our estimates of Rs2bn. The company reported EBITDA margin of 20.7% against our estimates of 21%. However, lower tax rate of 9.2% vs. est. 33.3% resulted in higher-than-estimated profits of Rs563mn (est. Rs495mn). Though the despatches growth improved in Q3 in the South region (In Q3 demand grew 3.3% YoY against decline of 4.3% reported in 9MFY12), the management believes that demand was primarily on the back of low base effect of last year and demand by private sector housing. Demand from infrastructure sector and government related projects have not yet improved, as per the management, but it believes that demand will be robust for next 4-5 months as busy construction period sets in. The management remains confident of passing on any cost push to the consumers. EBITDA margin of the company is expected to be in the range of 21-23% over the next two years against 12.1% in FY11. We roll forward our valuation to FY14 and maintain Buy rating on the stock with revised price target of 118 (earlier: Rs101), an upside of 25% from CMP.

 Higher realization and sales volume leads to improved performance: Revenue of the company increased 20.6% YoY to Rs9.4bn driven by a) 15.8% YoY increase in cement realization to Rs4,245/tonne and b) 7.1% YoY increase in cement sales volume to 2.19mt. Improvement in realization and sales volume led to 54.1% YoY growth in EBITDA and 2.6x increase in PAT to Rs563mn.

 Increase in operating costs offset by steep increase in realization: Operating cost for the Cement division increased 9.2% YoY to Rs3,380/tonne due to increase in energy costs, freight cost and raw material costs. Raw material cost increased 12% YoY to Rs584/tonne due to increase in fly ash and gypsum price. Freight cost increased 4.9% YoY to Rs783/tonne due to increase in railway freight charges and diesel price. Energy cost increased 7.2% YoY to Rs1,221/tonne due to a) increase in Electricity charges by Tamilnadu and Andhra Pradesh SEBs, b) increase in domestic coal price and c) higher usage of imported coal in the quarter. Despite higher operating costs, EBITDA margin improved 4.5pp YoY to 20.7% primarily driven by steep 15.8% increase in cement realization/tonne. EBITDA/tonne of cement increased 43.8% YoY to

 Management remains confident of cost push to consumers: Cement price in the South region has increased significantly over the last one year despite low demand and ~60% utilization rate. The management remained confident of passing on any cost increase to the consumers.

 Rolling valuations to FY14, maintain Buy: At the CMP, the stock trades at 6.8x FY14E EPS, 4.6x EV/EBITDA, and EV/tonne of US$77.8. The company is set to benefit from commissioning of power plants (50 MW power plant in Sankarnagar has been commissioned the trial run is going on) and coal procurement from its mines in Indonesia. We roll forward our valuation to FY14E and maintain Buy on the stock with revised price target of Rs118 (earlier: Rs101), an upside of 25% from CMP.