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India Cements |
Earnings continue to disappoint - Maintain SELL |
SELL
CMP: Rs116 Target Price: Rs114
n Adjusted loss at Rs449 mn (-132.5% yoy) below estimates (-Rs364 mn). Cement revenues (Rs7.9bn) decline 17.7% yoy – realisation down 15.4% yoy 9.6% qoq
n EBIDTA at Rs286mn down 90.4% yoy – below estimates (Rs435mn) – led by higher than estimated other expenses. EBIDTA/t atRs63 don 94% yoy and 84% qoq
n Downgrade FY11 earnings by 20.2% - maintain FY12 earnings as prices in southern India have bounced back sharply and are now closer to FY12 estimates
n Though we raise or TP to Rs114, ICL’s valuations of 8.2X EV/EBDITA & ~USD 78/t leaves little upside, considering FY12 RoCE at 6.3% is barely half the cost of capital - SELL
Cement revenues down 17.7% - realizations take a 15.4% plunge
Net revenues for the quarter declined by 15% yoy to Rs8.4bn (above estimates of
Rs8.1bn) on account of higher than expected cement realization and higher IPL
revenues booked during the quarter. During the current quarter volumes declined by
2.7% yoy to 2.72mnt impacted by poor offtake in southern India and delay in the
stabilization of Chilamakur Cement Plant. Poor demand and excess supply in southern
markets resulted in a 15.4% yoy, 9.6 qoq decline in realisation (Rs2909/t)
EBIDTA declined by 90.4% - EBIDTA/tonne at Rs63/t
Sharp drop in realisations, coupled with higher P&F cost (up 10.2%/t yoy due to higher
coal prices) and higher RM costs (up 18.9%/t yoy-due to soaring fly ash prices),
dragged EBIDTA down by 90.4% yoy to Rs286mn. EBITDA margins declined by a
massive 2669 bps to a meager 3.4%, while EBIDTA/t declined by 93.7% yoy to just
Rs63/t. Though we had factored in significant cost pressure in numbers EBIDTA was
below estimates (Rs435mn) on account of 31% yoy increase in other expenditure. Other
expenditure increased as it includes additional player compensation and distribution of
Champions Trophy price money among players. Consequently, though IPL revenues
were higher than estimates, there was negligible contribution at EBIDTA level.
Cost pressures still eating up on margins
On the cost front RM expenses/t (Rs506/t) increased by 18.9% yoy, due to increase in
royalty on limestone as well as higher prices of fly ash. Fuel price hike and increase in
lead distance led to 31.1% yoy jump in freight costs (Rs685/t). Significant increase in
international coal prices and erratic power supply (leading to higher cost of power
purchased/Generated through diesel genset -particularly in AP & TN) increased the P&F
costs by 10.2% yoy to Rs964/t. Overall variable cost increased 18.2% yoy to Rs2155/t.
Pre exceptional Net loss at Rs449mn, down 132.5%
ICL’s pre exceptional loss at Rs449 mn declined by 132.5% yoy. The reported loss at
~Rs336 mn, which includes extra ordinary income (forex translation gain of Rs112.5 mn
(On USD 745 mn FCCB), declined by 124.1% yoy.
ICL’s Rs12 bn capex plans on track- but strain on balance sheet to increase
debt funding for the capex
As far as ICL’s capex plans are concerned, work on the up-gradation of kiln at Chilamkur
has been completed during the current quarter Q2FY11. Indo Zinc, ICL’s subsidiary, which
is executing the 1.5 mtpa new line at Rajasthan, has started production from the last month
of this quarter. Further the 20 MW captive power plant is progressing as per schedule and
is expected to be completed during H2FY11.
Work on another 100 mw captive power plants at Sankarnagar and Vishnupuram, is
progressing and is expected to be completed by Q1FY12 & Q4FY12. ICL has completed
acquisition of coal mining rights in Indonesia and production form coal mine is expected to
start by end of FY11.
The total funds earmarked for the above mentioned capex is Rs12 bn, of which Rs6 bn
would be on Rajasthan cement plant and Rs5 bn on 100 MW CPP. However we would like
to highlight that the poor operating performance means that ICL would now have to rely on
higher proportion of debt to fund its capex program and this would further deteriorate the
company’s balance sheet.
Downgrading Earnings
To factor in lower cement volumes and continued cost pressures, we are downgrading our
earnings estimates by 20.2% for FY11E (EPS of Rs3.6). We are rolling over valuation to
FY12 numbers with revised price target of Rs114 as against Rs98 earlier. Our target price
includes Rs30/share (~ 30% of our TP) as value of ICL’s IPL franchisee Chennai Super
Kings. We continue to value ICL’s cement business at average of 8X its FY12 earnings and
USD 80 for its FY12 capacity. We maintain FY12 earnings as prices in southern India have
bounced back sharply and are now closer to FY12 estimates
Valuation at EV/EBIDTA of 8.2X EV/ton of USD78 leaves little upside –
Maintain SELL
ICL ranks the last in our cement coverage universe as far as return ratios are concerned. Its
RoCE (6.3% for FY11) and RoE (4.9% for FY11) are nowhere close to the cost of capital,
clearly suggesting destruction of shareholder value. At current levels, the stock is trading at
PER 19.9x, EV/EBIDTA of 8.2X and EV/ton of USD78 for its FY12E numbers. These
valuations leave little upside considering that ICL’S FY12 RoCE at 6.3% is barely half the
cost of capital - Maintain SELL
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