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UBS Investment Research
India Cements
Q3 FY11 results: below expectations
PAT below estimates, led by lower cement volumes
India Cements reported Q3 FY11 net sales of Rs7.8bn (-6% YoY, -7% QoQ) and
operating profit of Rs1.28bn (+12% YoY, +325% QoQ; below UBS’s estimate of
Rs1.4bn and consensus of Rs1.31bn). Q1 FY11 pre-ex PAT of Rs203m (adjusted
for FX loss of Rs18m) was below expectations (consensus estimate of Rs323m).
Net cement sales declined 4% YoY to Rs7.5bn due to lower sales volume (cement
volume during the quarter was 2.04mt; -25% QoQ, -23% YoY). The company
expects cement volume next year at 10-11mt and Indo-Zinc volume at 1mt.
EBITDA margin improved 12.8% QoQ to 16.4%
Its EBITDA margin improvement was led by higher net realisation, which
increased 26% QoQ to Rs3,677/t. Operating costs increased 7% QoQ to Rs3,209/t.
Power and fuel costs per tonne increased 18% QoQ to Rs1,135/t (power tariffs
increased in the states of Andhra Pradesh and Tamil Nadu), which was offset by
lower raw material costs. EBITDA per tonne increased 463% QoQ to Rs629/tonne.
Indonesian mine could commence production in another six months
Infrastructure-related works are currently ongoing and the company indicated
production could commence in June this year. Coal from these mines could meet
about 50% of the cement plants’ requirements. Coal costs in Q4 could be about
US$120/t (it currently has inventory for about two months).
Valuation: maintain Sell rating
We continue to value its cement business at 6.5x one-year forward EV/EBITDA
and the India Premier League (IPL) franchise contributes Rs26 to our price target.
Conference call takeaways
Volume: India Cements guided for sales volume of 10-11mt in FY12 and
Indo-Zinc volume of about 1mt. Cement volume for Q4 could be about
2.5mt, excluding Indo-Zinc volumes.
Power cost: Average power costs for Q3 FY11 was at Rs3.42 per unit
compared to Rs3.32 per unit in Q3 FY10. Higher power costs during the
quarter was attributable to a hike in power tariffs in Andhra Pradesh and
Tamilnadu by around 50paise per unit. The company is currently paying Rs4
per unit to acquire power from SEBs.
Coal costs: Average imported coal costs for Q3 FY11 was US$116 per
tonne compared to US$115 per tonne in Q2 FY11. The company currently
has two months of coal inventory with a cost of US$120-122 per tonne. Coal
costs for Q4 is expected at around US$120 per tonne.
Coal requirements: 700,000-800,000 tonnes of coal is imported for cement
plants and around 200,000 tonnes of coal are required for each captive power
plant (CPP) per year. The company is planning to support this via its captive
mine in Indonesia—up to 350,000-400,000 tonnes for cement plants and
400,000 tonnes for CPPs. The remaining coal requirement for cement and
CPPs will be met through outside purchases.
Indonesia coal mine: According to the company, infrastructure in the mine
is currently being created. The company expects to start mining in the next
five to six months (most likely in June). The average cost of raising coal is
expected to be US$35-40 per tonne. The average grade of the coal is
5,500kcal.
Rajasthan plant: Production started in January and India Cements expects
90,000 tonnes of sales in February from this plant. The 20MW CPP related
to the plant is scheduled for commissioning in June 2011. 50% of sales from
the plant occur in Gujarat, with the remaining 50% in Rajasthan and Madhya
Pradesh.
Power plants: The 50MW CPP in Tamil Nadu is on schedule for completion
in June 2011. Another 50MW CPP in Andhra Pradesh is expected to be
completed by Q4 FY12.
Capex: India Cements expects total capex of Rs6.5bn for the next two years.
Capex in FY11 up till now is Rs7.5bn.
Net debt: The company has debt of Rs24.9bn as of 31 December 2010
(includes foreign currency convertible bonds (FCCB) and a sales tax deferral
loan of Rs6bn). It is planning to redeem FCCBs and will raise debt for this
purpose. The average cost of its debt will be about 11.5% following the
FCCB refinancing.
Indo Zinc: The company has filed an application to issue rights at the Indo
Zinc level and is planning to conclude this by March 2011 if it received
approval from the Securities and Exchange Board of India (SEBI). Debt
given by India Cements is Rs3.5bn, which is likely to be converted to equity.
Indo Zinc has debt of Rs3bn.
IPL: Received all the central pool money due in Q3, the prize money for
championship league of US$2.5m is expected to be received in Q4. The
company also expects to receive sponsorship money in Q4.
India Cements
India Cements was incorporated in 1946 by N. Sankaralinga and T.S.
Narayanaswami, the co-founders of the Sankar group. It has a current capacity
of 9MT pa and is the largest cement company in South India. India Cements
plans to increase capacity to 14.2MT by December 2008 through organic growth.
However, it also plans to increase its presence beyond South India by
commissioning a 3.5MT plant in Rajasthan by FY11.
Statement of Risk
Key risk comes from significant decline in cement prices, delays in its capacity
additions, rise in input costs (mainly coal/freight) and any government
intervention to lower cement prices. India Cements imports close to 65-70% of
its requirements so any significant increase in imported coal prices are likely to
be negative for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Cements
Q3 FY11 results: below expectations
PAT below estimates, led by lower cement volumes
India Cements reported Q3 FY11 net sales of Rs7.8bn (-6% YoY, -7% QoQ) and
operating profit of Rs1.28bn (+12% YoY, +325% QoQ; below UBS’s estimate of
Rs1.4bn and consensus of Rs1.31bn). Q1 FY11 pre-ex PAT of Rs203m (adjusted
for FX loss of Rs18m) was below expectations (consensus estimate of Rs323m).
Net cement sales declined 4% YoY to Rs7.5bn due to lower sales volume (cement
volume during the quarter was 2.04mt; -25% QoQ, -23% YoY). The company
expects cement volume next year at 10-11mt and Indo-Zinc volume at 1mt.
EBITDA margin improved 12.8% QoQ to 16.4%
Its EBITDA margin improvement was led by higher net realisation, which
increased 26% QoQ to Rs3,677/t. Operating costs increased 7% QoQ to Rs3,209/t.
Power and fuel costs per tonne increased 18% QoQ to Rs1,135/t (power tariffs
increased in the states of Andhra Pradesh and Tamil Nadu), which was offset by
lower raw material costs. EBITDA per tonne increased 463% QoQ to Rs629/tonne.
Indonesian mine could commence production in another six months
Infrastructure-related works are currently ongoing and the company indicated
production could commence in June this year. Coal from these mines could meet
about 50% of the cement plants’ requirements. Coal costs in Q4 could be about
US$120/t (it currently has inventory for about two months).
Valuation: maintain Sell rating
We continue to value its cement business at 6.5x one-year forward EV/EBITDA
and the India Premier League (IPL) franchise contributes Rs26 to our price target.
Conference call takeaways
Volume: India Cements guided for sales volume of 10-11mt in FY12 and
Indo-Zinc volume of about 1mt. Cement volume for Q4 could be about
2.5mt, excluding Indo-Zinc volumes.
Power cost: Average power costs for Q3 FY11 was at Rs3.42 per unit
compared to Rs3.32 per unit in Q3 FY10. Higher power costs during the
quarter was attributable to a hike in power tariffs in Andhra Pradesh and
Tamilnadu by around 50paise per unit. The company is currently paying Rs4
per unit to acquire power from SEBs.
Coal costs: Average imported coal costs for Q3 FY11 was US$116 per
tonne compared to US$115 per tonne in Q2 FY11. The company currently
has two months of coal inventory with a cost of US$120-122 per tonne. Coal
costs for Q4 is expected at around US$120 per tonne.
Coal requirements: 700,000-800,000 tonnes of coal is imported for cement
plants and around 200,000 tonnes of coal are required for each captive power
plant (CPP) per year. The company is planning to support this via its captive
mine in Indonesia—up to 350,000-400,000 tonnes for cement plants and
400,000 tonnes for CPPs. The remaining coal requirement for cement and
CPPs will be met through outside purchases.
Indonesia coal mine: According to the company, infrastructure in the mine
is currently being created. The company expects to start mining in the next
five to six months (most likely in June). The average cost of raising coal is
expected to be US$35-40 per tonne. The average grade of the coal is
5,500kcal.
Rajasthan plant: Production started in January and India Cements expects
90,000 tonnes of sales in February from this plant. The 20MW CPP related
to the plant is scheduled for commissioning in June 2011. 50% of sales from
the plant occur in Gujarat, with the remaining 50% in Rajasthan and Madhya
Pradesh.
Power plants: The 50MW CPP in Tamil Nadu is on schedule for completion
in June 2011. Another 50MW CPP in Andhra Pradesh is expected to be
completed by Q4 FY12.
Capex: India Cements expects total capex of Rs6.5bn for the next two years.
Capex in FY11 up till now is Rs7.5bn.
Net debt: The company has debt of Rs24.9bn as of 31 December 2010
(includes foreign currency convertible bonds (FCCB) and a sales tax deferral
loan of Rs6bn). It is planning to redeem FCCBs and will raise debt for this
purpose. The average cost of its debt will be about 11.5% following the
FCCB refinancing.
Indo Zinc: The company has filed an application to issue rights at the Indo
Zinc level and is planning to conclude this by March 2011 if it received
approval from the Securities and Exchange Board of India (SEBI). Debt
given by India Cements is Rs3.5bn, which is likely to be converted to equity.
Indo Zinc has debt of Rs3bn.
IPL: Received all the central pool money due in Q3, the prize money for
championship league of US$2.5m is expected to be received in Q4. The
company also expects to receive sponsorship money in Q4.
India Cements
India Cements was incorporated in 1946 by N. Sankaralinga and T.S.
Narayanaswami, the co-founders of the Sankar group. It has a current capacity
of 9MT pa and is the largest cement company in South India. India Cements
plans to increase capacity to 14.2MT by December 2008 through organic growth.
However, it also plans to increase its presence beyond South India by
commissioning a 3.5MT plant in Rajasthan by FY11.
Statement of Risk
Key risk comes from significant decline in cement prices, delays in its capacity
additions, rise in input costs (mainly coal/freight) and any government
intervention to lower cement prices. India Cements imports close to 65-70% of
its requirements so any significant increase in imported coal prices are likely to
be negative for the company.
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