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India Cements Ltd.
Risks are still on the downside
􀂄Weak RoE profile to remain a drag on valuations
India Cements’ EV/capacity valuation at ~US$70/ton represents a ~40-45%
discount versus replacement cost. We expect valuations to remain around these
trough levels as the RoE profile is weak (~1% for FY12E). We think risks are still
on the downside if demand recovery fails to materialize and new south-based
capacities (viz JPA-Andhra) commission as per schedule. Maintain Underperform.
FY11-12E earnings cut; FCCB refinancing to hurt in FY12
We have cut FY11-12E earnings by 55-60%; the FY11E EPS cut is led by lower
EBITDA and the FY12E EPS cut primarily reflects higher interest costs. India
Cements holds foreign currency convertible bonds (redemption value of
~US$110mn) that are due to be redeemed in 1H FY12. We expect the refinancing
cost of these bonds to be ~11.5% vs avg. YTD interest cost of ~6-7%.
Cost-saving initiatives will take time to culminate
The Co is building 2x 50MW captive power plants (at Tamil Nadu and Andhra
Pradesh). The TN unit will likely commission in 1H FY12 while the AP unit is
expected to be ready in 2H-FY13. Coal-mining in Indonesia is also slated to
commence in 1H FY12. We think material cost savings are unlikely before FY13.
Mgt. points to demand uncertainty; expects rational pricing
On its results-call, the Co said demand recovery will depend on political stability in
key consuming states. Mgt. expects prices to be stable due to mature competition.
3Q results disappoint owing to higher freight & interest
India Cem reported 3Q FY11 EBITDA at ~Rs1.3bn, up 8% YoY. Rec. net profit fell
15% YoY to Rs197mn due to higher interest. Results were below our expectation.
Price objective basis & risk
India Cements (INIAF / IAMUY)
We have a price objective of Rs100/sh (GDR of US$2.2) for India Cements. We
value the company's cement business at an FY12E EV/capacity of around
US$70-75/ton based on nearly 40% discount to the industry's replacement cost of
US$120-125/ton. Our PO places the stock in line with the trough valuation of
industry majors during the previous down-cycle and values the Co's IPL franchise
at book. Owing to visible downturn in earnings, India Cements' valuations seem
rich relative to peers on both PE and EV/EBITDA. Further downside to our PO
could stem from a longer-than-anticipated downcycle, and unforeseen rise in
energy prices. Upside possibilities would stem from rational producer behavior
across the industry, unexpected delays in stabilisation of new capacities, and
unforeseen easing in energy prices, especially coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cements Ltd.
Risks are still on the downside
􀂄Weak RoE profile to remain a drag on valuations
India Cements’ EV/capacity valuation at ~US$70/ton represents a ~40-45%
discount versus replacement cost. We expect valuations to remain around these
trough levels as the RoE profile is weak (~1% for FY12E). We think risks are still
on the downside if demand recovery fails to materialize and new south-based
capacities (viz JPA-Andhra) commission as per schedule. Maintain Underperform.
FY11-12E earnings cut; FCCB refinancing to hurt in FY12
We have cut FY11-12E earnings by 55-60%; the FY11E EPS cut is led by lower
EBITDA and the FY12E EPS cut primarily reflects higher interest costs. India
Cements holds foreign currency convertible bonds (redemption value of
~US$110mn) that are due to be redeemed in 1H FY12. We expect the refinancing
cost of these bonds to be ~11.5% vs avg. YTD interest cost of ~6-7%.
Cost-saving initiatives will take time to culminate
The Co is building 2x 50MW captive power plants (at Tamil Nadu and Andhra
Pradesh). The TN unit will likely commission in 1H FY12 while the AP unit is
expected to be ready in 2H-FY13. Coal-mining in Indonesia is also slated to
commence in 1H FY12. We think material cost savings are unlikely before FY13.
Mgt. points to demand uncertainty; expects rational pricing
On its results-call, the Co said demand recovery will depend on political stability in
key consuming states. Mgt. expects prices to be stable due to mature competition.
3Q results disappoint owing to higher freight & interest
India Cem reported 3Q FY11 EBITDA at ~Rs1.3bn, up 8% YoY. Rec. net profit fell
15% YoY to Rs197mn due to higher interest. Results were below our expectation.
Price objective basis & risk
India Cements (INIAF / IAMUY)
We have a price objective of Rs100/sh (GDR of US$2.2) for India Cements. We
value the company's cement business at an FY12E EV/capacity of around
US$70-75/ton based on nearly 40% discount to the industry's replacement cost of
US$120-125/ton. Our PO places the stock in line with the trough valuation of
industry majors during the previous down-cycle and values the Co's IPL franchise
at book. Owing to visible downturn in earnings, India Cements' valuations seem
rich relative to peers on both PE and EV/EBITDA. Further downside to our PO
could stem from a longer-than-anticipated downcycle, and unforeseen rise in
energy prices. Upside possibilities would stem from rational producer behavior
across the industry, unexpected delays in stabilisation of new capacities, and
unforeseen easing in energy prices, especially coal.
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