>INDIA CEMENTS

Recommendation: Buy (SHAREKHAN)
Price target: Rs110
Current market price: Rs85

Operating performance in line with estimates

Result highlights

• Operating performance in line with estimates; adjusted net profit below estimates: In Q1FY2013 India Cements posted an adjusted net profit of Rs82 crore (a decrease of 21.9% year on year [YoY]). The same is below our estimate on account of a higher than expected interest cost of Rs95 crore (an increase of 63% YoY) and a foreign exchange (forex) loss of Rs25 crore. However, the operating profit of the company is much in line with our estimate at Rs277.7 crore (higher by 14.9% YoY). 
• Revenue growth driven by healthy realisation and IPL income; in line with estimates: The net sales of the company grew by 13.7% YoY to Rs1,201.4 crore (largely in line with our estimate), which also includes revenues from the Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement division (cement is its core business) improved by 10.8% YoY to Rs1,062.9 crore largely driven by a 7.6% growth in the average cement realisation. However, on the volume front, the southern region continues to witness a lacklustre demand environment. Hence, the volume grew by just 2.9% YoY to 2.38 million tonne (mt). On the other hand, the revenues from the IPL division jumped to Rs122 crore as against Rs84.8 crore in the corresponding quarter of the previous year. The shipping division booked Rs12.5 crore of revenues during the quarter. 
• Cost pressure largely offset the benefit of improvement in cement realisation: On the margin front, in spite of a 7.6% improvement in the cement realisation YoY, the continued cost pressure-in terms of (a) a higher power & fuel cost (up 16.8% on per tonne basis); (b) higher freight charges (up 21% YoY); and (c) higher employee cost (up 23.6% YoY to Rs78.7 crore)-largely offset the benefit of the increased realisation. Hence, the operating profit margin (OPM) could expand marginally by 25 basis points YoY to 23.1%. The overall cost of production on a per-tonne basis increased by 8.4% YoY and the EBITDA per tonne increased by 5% YoY to Rs1,033. Consequently, the operating profit of the company increased by 14.9% YoY to Rs277.7 crore.  
• Surge in interest cost due to forex loss: The interest cost increased by 63% YoY to Rs94.9 crore on account of an increase in the borrowings at a higher rate to redeem the outstanding foreign currency convertible bonds and a forex loss of Rs25 crore. The total borrowings of the company stood at Rs2,880 crore as compared with Rs2,700 crore at the end of FY2012. Further, a one-time expense of Rs20 crore was incurred on account of the operations of the IPL franchise. Hence, the reported net profit declined by 39.2% YoY to Rs62 crore whereas the adjusted net profit works out to Rs82 crore (a decline of 21.9% YoY). 
• CCI has imposed a penalty of Rs187.5 crore; the company will appeal against the CCI order: The Competition Commission of India (CCI) has imposed a penalty on around 11 cement companies for making a cartel and managing cement prices at higher levels. As per the CCI order, India Cements will have to pay Rs187.5 crore as a penalty. However, based on the legal opinion the company will appeal against the order before the Tribunal. Accordingly, the company has not made any provision for the CCI penalty. 
• Fine-tuned earnings estimates for FY2013 and FY2014: We have fined-tuned our earnings estimates for FY2013 and FY2014 mainly to incorporate the higher than expected cost pressure (a higher freight cost) and a lower than expected volume growth. We have also factored in the higher than expected cement realisation in our estimates. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 are Rs9.6 and Rs11 respectively. 
• Maintain Buy with price target of Rs110: The demand for cement in the key market (southern region) of India Cements is likely to witness a partial recovery driven by the private sector housing industry and a pick-up in the rural demand. Further, in order to get better volumes and realisations the company is trying to change its market mix in favour of the non-Andhra Pradesh states and the western region. On the realisation front, the cement price in the southern region stands at a healthy level and we expect the average realisation in FY2013 to remain higher compared with that in FY2012. Moreover, with the commissioning of its captive power plant (CPP) the company will benefit by saving cost and gaining a regular supply of power. However, in order to deliver higher volumes the realisation could come under pressure. Cost pressure in terms of any adverse movement in the price of imported coal and a higher freight cost would partially offset the positive impact of the increased realisation and the savings from the CPP. We maintain our Buy recommendation on the stock with a price target of Rs110. At the current market price the stock trades at a PE of 7.7x discounting its EPS for FY2014 and EV/EBITDA of 4.4x its FY2014E earnings.

RISH TRADER