Thursday, May 3, 2012

>INDIA CEMENTS: Q4FY12 Result update

Higher costs lead to disappointing performance

India Cements’ Q4FY12 result was sharply below our estimates led by lower than- expected sales volume (2.6mt vs. est. 2.7mt), higher employee expenses (Rs921mn vs. est. Rs780mn) and higher power & fuel cost (Rs1,221/tonne vs. est. Rs1,150/tonne). Impacted by lower sales volume, the company reported revenue of Rs11.2bn against our estimate of Rs11.9bn. EBITDA at Rs2.15bn was 14.7% lower than our estimate of Rs2.5bn due to higher employee cost and power & fuel cost and EBITDA margin was at 19.3%, 1.9pp lower than estimate of 21.1%. Higher employee cost was due to higher directors’ remuneration and provision for leave encashment. Higher-than-expected cost pressure resulted in EBITDA/tonne of Rs828 against our estimate of Rs897/tonne. Adjusted profit was 20.5% below our estimate of Rs649mn. Cement despatches in the south region grew 9% in Q4 against a negative growth of 3% in 9MFY12. However, going forward, the management expects demand growth at 7-8% in FY13E. Cement realization increased by 25% YoY in FY12 despite lower utilization rate of 67% and the management is confident of passing on any cost push to consumers. Led by higher realization EBITDA margin improved to 20.3% in FY12 against 12.1% in FY11 and we
expect it to reach 22.8% in FY13E. We maintain Buy on the stock with a target price of Rs118 (upside of 35% from CMP).

 Higher realization and sales volume leads to improved performance:
Revenue of the company increased 11.8% YoY to Rs11.2bn driven by a) 11.4% YoY increase in cement realization to Rs4,248/tonne and b) 2% YoY increase in cement sales volume to 2.6mt. Improvement in realization and sales volume led to 20.4% YoY growth in EBITDA to Rs2.15bn and EBITDA margin improved 1.4pp YoY to 19.3%. Adjusted profit of the company increased 18.6% YoY to Rs649mn.

 Lower sales, higher operating cost lead to below expected EBITDA/tonne:
Cement and Clinker sales volume was at 2.6mt against our estimate of 2.7mt, which led to below expected revenue. Higher employee expense (Rs921mn vs. est. Rs780mn due to Rs110mn each for director’s remuneration and provision for leave encashment) and higher power & fuel cost (Rs1,221/tonne vs. est. Rs1,150/tonne) resulted in lower-than-estimated EBITDA margin of 19.3% (est. 21.1%) and EBITDA/tonne of Rs828 (est. Rs897/tonne).

 Increase in operating costs offset by steep increase in realization:
Operating cost for the Cement division increased 10% YoY to Rs3,426/tonne due to higher power & fuel cost, freight cost and employee expenses. Employee expense increased 34.8% YoY to Rs354/tonne and freight cost by 10.6% YoY to Rs815/tonne due to higher railway freight charges and diesel price. Power & fuel cost increased 24.1% YoY to Rs1,221/tonne due to a) increase in Electricity charges by Tamil Nadu and Andhra Pradesh SEBs, b) increase in domestic coal price and c) higher use of imported coal in Q4.

 Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.3x FY14E EPS, 4.3x EV/EBITDA, and EV/tonne of US$73.3. The company is set to benefit from commissioning of power plants and coal procurement from Indonesian mines. We maintain Buy on the stock with price target of Rs118.