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Warming South winds
High exposure to South a concern; hopes pinned on better prices
Out of total 14mn tonnes of cement capacity of India Cements Limited
(ICL), about 92% of the capacity is in the Southern region. Due to
lower consolidation and lower capacity utilizations, we expect south
based players to earn 36% lower EBIT per tonne than players in other
regions. However, in the recent past, South cement players have
shown signs of maturity and better coordination. In past few weeks,
cement prices in the region have increased by INR 75-100/bag.
Cost rationalization in progress; return ratios to reflect the effort
In order to rationalize the cost structure, ICL has acquired a coal mine
in Indonesia, and is in the process of setting up CPP of 100 MW. We
believe that the mine acquisition will result in savings of ~INR
200/tonne from FY12 onwards. The CPP is expected to generate
additional savings of INR 50/tonne from Q3FY12. Historically return
ratios of ICL have been below industry average due to lower
profitability and inefficient utilization of capital. However, with the cost
rationalization steps undertaken by the company and the recent rise in
cement prices in South, we believe that return ratios will gradually
improve going ahead.
IPL not factored in total valuation scoreboard
India Cements owns franchise rights of an IPL team (Chennai Super
Kings). We believe that the present stock price does not reflect the
valuations of IPL team. With few of the IPL teams expected to list in
near future we believe that market will gradually start factoring IPL
valuations in stock price. We have valued the investment in IPL at
USD225mn which was the base price for the bidding of new
franchises. Any increase in the valuation of IPL franchise will add to the
potential upside in the stock. (Please refer to Exhibit 13 on Page 59 for
target valuations at different IPL valuations).
Valuation
At the CMP of INR116 per share, the stock is trading at 18.4x and
10.7x its FY11E and FY12E earnings, respectively. It is trading at
adjusted EV/tonne of USD62 and USD56 of its FY11 and FY12
capacities respectively. We have assigned our distress case valuation
of USD62/tonne for the cement business considering the
unfavorable regional presence and relative cost disadvantage. We
have valued the investment in IPL at USD225mn which was the
base price for the bidding of new franchises. We recommend
Accumulate on ICL with target price of INR 131.
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