INDIA CEMENTS Below par performance: Edelweiss

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􀂄 PAT below estimate; weak demand and low realisations hit margin
India Cements (ICEM) reported loss of INR 336 mn on account of lower
realizations and volumes coupled with higher input cost in Q2FY11. Excluding the
gain on foreign exchange for FCCB, the company reported loss of INR 449 mn.
Volumes, at 2.7 mt, dipped 3% Y-o-Y and flat Q-o-Q and blended realization fell
15% Y-o-Y and 9.4% Q-o-Q to ~INR 2,909/t. Pure cement realization fell INR
15/bag Q-o-Q to ~INR 2,912/t. Management has indicated post the production
discipline and the resultant increase in price, realizations have risen to higher
than in Q1FY11 and close to Q2FY10 level (our future price assumptions already
incorporate this). In Tamil Nadu, the company had to roll back prices by INR
10/bag. Cement EBITDA/t slumped to the lowest in the past 18 quarters as cost
increases continued even as realizations slumped during the quarter. The current
NCR stands at ~INR 2,230/t compared to INR 2,519/t in Q1FY11.


􀂄 Higher costs dent profitability
On the costs front, raw material cost per tonne (including stock adjustments)
stood at INR 520, up 19% Q-o-Q on account of higher fly ash cost. Increased
seasonal power consumption, elevated cost of power from the grid, and higher
coal cost (average cost of imported coal for Q2FY11 was USD 116/t) led to 11%
Y-o-Y jump in power and fuel costs. Freight cost jumped 32% Y-o-Y to INR 687/t
due to increase in lead distance and hike in diesel prices.

􀂄 Capex plan of ~INR 11 bn over three years reiterated
The 1.5 mtpa expansion in Rajasthan has come on stream with commercial
production likely in Q3FY11; full capacity utilization likely in mid FY12.
Management guided that the total capex to be incurred on the Indonesian coal
mine will be ~USD 20 mn. However, actual savings will depend upon the calorific
value and will be known only later. The total capex planned for the next three
years will be ~INR 11 bn, out of which ~INR 5 bn has already been spent. Power
plants aggregating 100 MW will commence in the next fiscal which will lead to
substantial savings in power cost and reduce dependency on the grid.

􀂄 Outlook and valuations: Remain cautious; maintain ‘REDUCE’
At CMP of INR 116, the stock is trading at FY12E EV/t of USD 81 which is fair
considering the lack of captive power. We remain cautious on the southern region
since it is likely to account for bulk of all-India capacity additions. Further, costs
are likely to inch up going ahead which coupled with reduced pricing power is
expected to result in declining profitability. Hence, we maintain our ‘REDUCE’
recommendation. On relative basis, the stock is rated ‘Sector Underperformer’.