>HEIDELBERG CEMENT INDIA

Volume & Price driven growth
HCIL reported a healthy revenue growth of 22.6% YoY to INR 3050mn, led by volume growth of 6.5% to 0.77 mt coupled with 15.1% improvement in cement realisations to INR 3941/tn. Strong demand in Central & Western region enabled the company to operate at almost full capacity utilisation levels (93% in Q2CY11). Going forward we expect HCIL to clock volume CAGR of 29% over CY11 - CY13E led by increased capacity from Sept 2012.


Sharp improvement in margins
EBIDTA margins expanded by 283 bps YoY & 398 bps on QoQ basis to 12.1% led by firm cement prices. Freight cost increased by only 3.7% QoQ to INR 523/tn, due to shift in rail:road mix from 49:51 to
61:39. (June Quarter witnessed full impact of the ~20% increase in rail freight announced in March 2012). Power & Fuel cost increased at a slower pace by 2.3% QoQ to INR 1003/tn due to optimization of power consumption.


EBIDTA/tn improved by 50.2% YoY & 64.9% QoQ to INR 478 in Q2CY11. Net profit rose by 46.4% YoY & 68.6% QoQ to INR 193 mn.


New capacities on track
HCIL's new additional capacity of 1 mpta grinding unit in Damoh (MP) & 1.9 mtpa grinding unit in Jhansi (UP) remains on track and is all set to commission operations from September 2012. This expansion is well timed as it will enable the company to maintain its market share and enjoy the economies of scale. HCIL is also setting up a conveyor belt from limestone mines to the clinkerisation unit (20 kms), which will lead to ~30% savings in transportation cost.


Increasing usage of pet coke
HCIL has increased its usage of pet coke from 20% of its total fuel requirement in CY11 (balance 80% through linkage coal/imported coal) to ~35% in the last quarter due to decline in prices of pet coke.


Banking on central region to drive growth
HCIL is focussing on central region to drive growth. We expect the central region to outperform the industry with an estimated demand growth of ~10% in CY12. MP has witnessed a YoY growth of 22% in the last quarter and we expect this growth momentum to sustain due to state elections due next year. While currently it sells ~65% of its total production in this region, HCIL expects this share to increase to 85% post expansion.


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, savings on transportation front and higher utilisation levels places HCIL on a superlative growth path. At the CMP of INR 33, the stock trades at P/BV of 0.8x & EV/ EBIDTA of 5.0x its CY13E earnings and EV/tonne of $34 (CY13E capacity). We have changed our estimates to factor in improving margins and retain our BUY
rating on the stock with a target of INR 50/share.

To read report in detail: HEIDEILBERG CEMENT