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Removed from Asia Pacific Sell List
India Cements (ICMN.BO)
Equity Research
Disappointing 3Q, negatives priced in, up to Neutral on valuation
What happened
We upgrade India Cements (ICMN) to Neutral from Sell, post the recent
underperformance - the stock is trading below our 12-month EV-RC based
target price of Rs93, implying 3% upside. While we continue to believe that
the margin recovery will remain muted in FY12, given excess capacity,
weak demand in South India and higher fuel costs, all the negatives seem
to be priced in at current levels. ICMN is trading at 75% FY12E EV/RC vs.
mid-cycle of 90%. Since we added ICMN to our Sell list on June 22, 2010, it
has fallen 20% vs. 2% decline for Sensex. (Last 12 months: -25%, vs. +10%
for Sensex).
Current view
India Cements reported 3QFY11 net income at Rs215mn, down 38% yoy,
38% below GS estimates and Bloomberg consensus. 3QFY11 revenue was
8% below our expectations, as 3Q volumes surprised to the downside –
sales stood at 2.04mn tons, down 23% yoy, down 25% qoq with capacity
utilization rate at a disappointing ~60%. Average realizations improved
23% qoq (+Rs 722/t qoq) vs. GSe of 19.3% qoq. However, this did not
translate into a commensurate increase in EBITDA/T (which improved by
+Rs 519 qoq) due to higher cost of coal and revised power tariffs in Andhra
Pradesh and Tamil Nadu. EBITDA/ton came at Rs 631 vs. Rs112 in 2Q.
Interest costs in 3Q were up 45% qoq, led by higher working capital
financing and loan draw down for the Rajasthan expansion. We lower our
FY11E-FY13E estimates by 19%-34% to account for high thermal coal costs
(India Cements imports 70% of its coal requirements), the delay in ramp up
of the Indonesia coal mines and higher interest costs.
While we continue to stay cautious on pace of margin recovery, at current
valuations (0.6x P/B) the risk-reward looks balanced.
Key risks include: upside: faster-than-expected recovery in pricing;
downside: higher coal costs and lower-than-expected demand growth in
South India.
INVESTMENT LIST MEMBERSHIP
Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACTION
Removed from Asia Pacific Sell List
India Cements (ICMN.BO)
Equity Research
Disappointing 3Q, negatives priced in, up to Neutral on valuation
What happened
We upgrade India Cements (ICMN) to Neutral from Sell, post the recent
underperformance - the stock is trading below our 12-month EV-RC based
target price of Rs93, implying 3% upside. While we continue to believe that
the margin recovery will remain muted in FY12, given excess capacity,
weak demand in South India and higher fuel costs, all the negatives seem
to be priced in at current levels. ICMN is trading at 75% FY12E EV/RC vs.
mid-cycle of 90%. Since we added ICMN to our Sell list on June 22, 2010, it
has fallen 20% vs. 2% decline for Sensex. (Last 12 months: -25%, vs. +10%
for Sensex).
Current view
India Cements reported 3QFY11 net income at Rs215mn, down 38% yoy,
38% below GS estimates and Bloomberg consensus. 3QFY11 revenue was
8% below our expectations, as 3Q volumes surprised to the downside –
sales stood at 2.04mn tons, down 23% yoy, down 25% qoq with capacity
utilization rate at a disappointing ~60%. Average realizations improved
23% qoq (+Rs 722/t qoq) vs. GSe of 19.3% qoq. However, this did not
translate into a commensurate increase in EBITDA/T (which improved by
+Rs 519 qoq) due to higher cost of coal and revised power tariffs in Andhra
Pradesh and Tamil Nadu. EBITDA/ton came at Rs 631 vs. Rs112 in 2Q.
Interest costs in 3Q were up 45% qoq, led by higher working capital
financing and loan draw down for the Rajasthan expansion. We lower our
FY11E-FY13E estimates by 19%-34% to account for high thermal coal costs
(India Cements imports 70% of its coal requirements), the delay in ramp up
of the Indonesia coal mines and higher interest costs.
While we continue to stay cautious on pace of margin recovery, at current
valuations (0.6x P/B) the risk-reward looks balanced.
Key risks include: upside: faster-than-expected recovery in pricing;
downside: higher coal costs and lower-than-expected demand growth in
South India.
INVESTMENT LIST MEMBERSHIP
Neutral
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