Macquarie: Buy India Cements -Value emerging, risks remain; Target Rs108

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India Cements
Value emerging, risks remain
Event
 3QFY11 results- recovery starts: India cements returned back to profits
driven by improvement in realisation. However this came on back of
curtailment of volumes as industry resorted to supply discipline. We have
incorporated higher cement prices and lower volumes but still maintained
earnings (-1%) both for FY12 and FY13. As we roll forward to FY12, our DCF
value increases to Rs108.

 We are upgrading India Cements to Outperform as the recent correction in
stock gives a very good entry point. We also are encouraged by its cost
reduction potential with its upcoming power plant and captive coal mine.
However, its earnings can be volatile in the near term due to oversupply
issues. We increase target price to Rs108 from Rs94.
Impact
 3QFY11 results – back to black:  Net Sales declined 7.2% QoQ to Rs7.8bn,
due to steep drop of 25% in volumes, balanced by 23% rise in realizations.
EBITDA at Rs1.3bn was an improvement from Rs286m in last quarter as
EBITDA per ton improved to Rs619/t from Rs106/t. Net Profit at Rs215m
recovered from a loss of Rs336mn reported last quarter.
 Building in lower volumes and higher cement prices: We have cut cement
volume by 11-17% for FY11-13 but increased realisation between 3-5%.
While FY11 earnings are sharply down, the change in FY12 and FY13
earnings is limited. Also consolidated for subsidiary Indo Zinc.
 This puts us well above consensus: Our earnings now stand at 18% and
11% ahead of consensus for FY12 and FY13 respectively. This is based on
EBITDA/t of Rs690/t and Rs780/t for FY12-13, slightly above the Rs619
reported this quarter but lower than our estimate of Rs727/t for Q4FY11.
 Maturing FCCB – but debt already tied up: India Cement has an
outstanding FCCB of US$75m which is getting matured by May’11. Company
has tied up significant part of financing to repay this loan which will stand at
US$120m at maturity.
Earnings and target price revision
 We are reducing earnings estimates for FY12 and FY13 by 1% each.
Price catalyst
 12-month price target: Rs108.00 based on a DCF methodology.
 Catalyst: Cement realisation increases and start of coal mining
Action and recommendation
 Upgrading to Outperform:  India Cements is trading at inexpensive
valuation of US$74 of EV/t which is 30% discount to replacement costs and
has limited downside. It is also becoming more cost competitive which should
act as a buffer. We believe start of its captive coal mines will be key trigger for
re-rating, along with stable pricing in the near term.