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India Cements (ICEM)
Cement
Resurgent South? In a dramatic turnaround, cement prices in South increased to
Rs260/bag in October, but retraced by ~Rs10-15 bag in November, as muted demand
growth did not allow for prices to sustain at these levels. ICEM has not been able to
fully capitalize on improved cement prices as the benefits of higher realization have
been lost to lower-than-industry volume growth. We maintain our SELL rating with a
revised target price of Rs95/share
Prices spike in October, only to retrace in subsequent months
Cement prices in South India witnessed a sharp revival in October, increasing to Rs260/bag.
However, recent media reports indicate (corroborated through channel checks) that cement prices
have been cut by Rs10-15/bag over the last fortnight, highlighting that the price revival was not
supported by a corresponding revival in demand. We highlight that prices in South have been
volatile and previous rounds of price hikes have not sustained on account of a muted demand
growth and burgeoning oversupply situation. We therefore curtail our optimism, while factoring a
sequential price increase of Rs30/bag compared to Rs10/bag factored by us previously.
Absence of volume growth not allowing for sustainable price increase
Cement volumes in South registered a 0.5% yoy growth as against the industry average of 17% in
October 2010 and we expect further moderation in November given the overall slowdown in the
sector (as indicated by headline despatch numbers). We therefore believe that the magnitude of
price hike witnessed in South is not supported by a corresponding revival in demand as South
continues to lag the rest of the country in cement offtake. Further, ICEM’s volumes growth of
0.1% yoy for October was lower than Southern average and we see lower-than-estimated offtake
as a key risk to our FY2011E estimates. We now factor volumes of 11 mn tons in FY2011E
(previously 11.6 mn tons).
Maintain SELL rating with a revised target price of Rs95/share
We maintain our SELL rating with a revised target price of Rs95/share as we revise our realization
assumptions on back of the price revival and simultaneously adjust for a muted volume growth.
We continue to remain cautious on ICEM on account of (1) concerns over sustenance of price in
absence of a corresponding demand revival, (2) predominant exposure in South India, the most
fragmented market in India with highest vulnerability to succumb to pricing pressures, and (3) high
leverage including repayment of FCCB of US$111 mn in FY2012E. ICEM is currently trading at
7.3X FY2012E EBITDA and US$91/ton on FY2012E production.
We have revised our EPS estimate to Rs5.3/share in FY2011E (previously Rs4.6/share) and to
Rs7.9share in FY2012E (previously Rs7/share) as we (1) account for increased prices in South,
(2) adjust for lower volumes and (3) marginally revise our input cost assumptions. We do not
currently ascribe any value to ICEM’s ownership in the IPL franchisee due to lack of sufficient
details on the financials of the cricket franchisee, though a valuation of ~US$100 mn could
translate into a per share value of Rs15 for ICEM.
High leverage – strain on the balance sheet
ICEM had a net debt of Rs24.5 bn (implying a net debt to equity of 60%) as of September
2010. Debt includes FCCB (issued amount US$75 mn) due to mature in FY2012E which
would most likely entail repayment of US$111 mn. We believe strained balance sheet of
ICEM’s limits any capex options for ICEM as majority of its near-term operational cash flow
would be used for debt repayment.
South India – a fragmented market
Exhibit 3 below highlights that South India is the most fragmented cement market in the
country with top five players accounting for just 50% of the market share. Absence of
consolidation reduces the pricing power of South-based cement manufacturers, making
them vulnerable to succumb to competitive forces of demand and supply. We therefore are
less optimistic on the recent round of price hike as we believe that the demand-supply
scenario in South will likely continue to make such price increases vulnerable.
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