Credit Suisse: India Cements 3QFY11: Lower volumes significantly drag down profitability

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India Cements ------------------------------------------------------------------------ Maintain NEUTRAL
3QFY11: Lower volumes significantly drag down profitability


● India Cements reported 3Q11 pre-exceptional PAT of Rs197 mn,
76% below our estimates, on lower revenue, higher interest costs
and higher tax realisation. Cement volumes stood at 2.04 mn t for
3Q11, down 23% YoY. Average realisation at Rs3,665/t went up
21% YoY and was 6% ahead of our estimates.
● Adjusted EBITDA/t stood at Rs564/t, 10% lower than our estimate
of Rs624/t. Power and fuel costs went up 25% YoY, whereas
freight costs were up 17% YoY, putting pressure on margins.
● Management expects demand in the South to pick up gradually but
expects prices there to remain stable, subject to manufacturers
maintaining discipline. Around 2.5 mn t cement volumes are
expected for 4Q FY11 and 10-11 mn t for FY12. We expect mining
from Indonesian coal mine to commence in June 2011.
● We cut our FY11 EPS estimate by 11%, as we lower our FY11
volumes assumptions. We now build in higher margins for
FY12/FY13. We revise our target price to Rs115 (from Rs116),
out of which Rs12 comes from ICEM’s stake in Indo Zinc.

Volumes decline 23% YoY, PAT 76% below estimates

Cement volumes at 2.04 mn t for 3Q FY11 declined 23% YoY due to

slowdown in the southern market. Average realisation at Rs3,665/t

went up 21% YoY and was 6% ahead of estimate. Revenue at Rs7.8

bn declined 10% YoY and was 16% below our estimate. Preexceptional

PAT at Rs197 mn was 76% below estimates on lower

revenue, higher interest costs and higher tax realisation. EBITDA

margin at 16.2% declined 268 bp YoY and was 317 bp lower than

estimates. FX translation gain stood at Rs18 mn, and management

indicated that the company intends to redeem the FCCBs, major

funding for which has already been tied up.

EBITDA/t adjusted for IPL and shipping stood at Rs564/t, improving

sequentially (Rs66/t in 2Q11), but not to the extent expected. Power

and fuel costs went up 25% YoY on higher power tariffs and rise in

imported coal costs. Freight costs went up 17% YoY.

Management has guided for 10-11 mn t cement sales in FY12. The

1.5 MT Rajasthan plant put up by Indo Zinc commenced commercial

production from January 2011 and is expected to contribute 1 mn t

additional volumes in FY12. The 50 MW Tamil Nadu captive power

plant is expected to be commissioned by June 2011 and the 50 MW

AP plant is expected to be commissioned by 4Q FY12. Mining from

Indonesian coal mine is expected to commence in June 2011.

Revise our estimates, target price of Rs115

Given the weak 3Q FY11 results, we cut our FY11 EPS estimate by

11%. We now build in higher margins, leading to 207%/84% increase

in FY12/FY13 EPS estimates on high operating leverage. Our target

price stands at Rs115 (from Rs116), which includes Rs12 from

ICEM’s stake in Indo Zinc.