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ICEM is facing challenging times, with negative demand growth in South India (-2.2%),
resulting in under-utilised expanded capacity. However, the stock trades at US$60 EV/mt (a
46% discount to replacement cost) and ICEM has a dominant 20% market share in South
India. Buy maintained with a new Rs118.20 TP.
ICEM’s EBITDA grew 10.5% in 3QFY11 – weaker than we had expected
ICEM’s revenue declined 10% as its cement volume sales fell 23%. However, the revenue
decline was moderated by a sharp improvement in cement prices (20% yoy) in the South
Indian market. It recorded an EBITDA/mt of Rs580, over Rs422/mt in 3QFY10 and Rs110/mt
in 2QFY11. Due to weak volumes, ICEM’s operating costs per mt increased significantly
given its adverse operating leverage.
We remain cautious on the medium-term sector outlook
The Indian cement industry is operating at 75% capacity utilisation, and South India at 65%.
This clearly exposes the industry to price weakness. The demand slowdown in FY11 so far
(5% for India overall and 2% in South India), we believe, will further prolong the demandsupply
imbalance into 2HFY13. Hence, we remain cautious on sector margins for the next
four to six quarters.
We cut our earnings, but maintain our Buy rating
ICEM intends to focus on capex over the next two years to structurally reduce costs. It is setting
up captive power plants in the Indian states of Andhra Pradesh and Tamil Nadu, and plans to
source coal from its upcoming mines (for which leases have been acquired) in Indonesia. We
have adjusted our earnings on weaker-than-expected cement volumes and higher interest costs.
While the stock looks expensive on earnings multiples, due to underutilisation of its cement
capacity of 16mmt (including subsidiary Indo Zinc’s capacity), we believe its valuations at
US$60/mt on EV/mt is at a 46% discount to the replacement cost. We have lowered our target
price to Rs118.20, from Rs130.90.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICEM is facing challenging times, with negative demand growth in South India (-2.2%),
resulting in under-utilised expanded capacity. However, the stock trades at US$60 EV/mt (a
46% discount to replacement cost) and ICEM has a dominant 20% market share in South
India. Buy maintained with a new Rs118.20 TP.
ICEM’s EBITDA grew 10.5% in 3QFY11 – weaker than we had expected
ICEM’s revenue declined 10% as its cement volume sales fell 23%. However, the revenue
decline was moderated by a sharp improvement in cement prices (20% yoy) in the South
Indian market. It recorded an EBITDA/mt of Rs580, over Rs422/mt in 3QFY10 and Rs110/mt
in 2QFY11. Due to weak volumes, ICEM’s operating costs per mt increased significantly
given its adverse operating leverage.
We remain cautious on the medium-term sector outlook
The Indian cement industry is operating at 75% capacity utilisation, and South India at 65%.
This clearly exposes the industry to price weakness. The demand slowdown in FY11 so far
(5% for India overall and 2% in South India), we believe, will further prolong the demandsupply
imbalance into 2HFY13. Hence, we remain cautious on sector margins for the next
four to six quarters.
We cut our earnings, but maintain our Buy rating
ICEM intends to focus on capex over the next two years to structurally reduce costs. It is setting
up captive power plants in the Indian states of Andhra Pradesh and Tamil Nadu, and plans to
source coal from its upcoming mines (for which leases have been acquired) in Indonesia. We
have adjusted our earnings on weaker-than-expected cement volumes and higher interest costs.
While the stock looks expensive on earnings multiples, due to underutilisation of its cement
capacity of 16mmt (including subsidiary Indo Zinc’s capacity), we believe its valuations at
US$60/mt on EV/mt is at a 46% discount to the replacement cost. We have lowered our target
price to Rs118.20, from Rs130.90.
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