Most stressed of the lot
Suffering from southern shocks
High exposure to south India has resulted in severe pressure on the
profitability of India Cements, with its cement EBITDA down almost
50% on a y-y basis. As a result, India Cements has been the worst
performer in our coverage universe since mid-January.
Significant cash requirement on the anvil
According to our estimates, the company will need to raise cash of
about Rs19bn in FY11F to: 1) redeem a foreign currency convertible
bond (FCCB) worth Rs5bn, which is unlikely to be converted into
equity, 2) fund Rs8bn of planned capex; and 3) refinance Rs5.7bn of
existing debt. Although the debt equity ratio of India Cements is still in
a comfort zone of about 0.5x, we believe its debt servicing capability
will be tested given it has reported an EBITDA of Rs1bn-Rs1.3bn over
the last three quarters.
Not building in potential upsides from Indonesian coal
India Cements has acquired a coal mine in Indonesia, which enables
it to substitute imported coal at almost half the cost. The company
expects to start getting the coal by the end of this year. However,
since the company has missed one of its earlier targeted deadlines,
we are not building this upside into our estimates.
Valuations
We value India Cements using the sum-of-the-parts valuation
methodology. We value the core cement business on an EV/IC-based
valuation, using an average ROCE of 8% over FY11F-FY13F. We
have also ascribed a value of Rs26 per share to the company’s Indian
Premier League franchise. Our revised price target of Rs89 implies
25% potential downside from current levels
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