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India Cements: Light at the end of the tunnel; maintain Buy
Volume growth
We expect volume growth to return after degrowth
in FY11. We estimate volume CAGR
of 10% over FY11-13 as against 4.9% over
FY09-11.
Volume growth would be driven by demand
pick-up in South India and entry into North
India.
We expect capacity utilization to improve
from 65% in FY11 to 74% in FY12 and 78%
in FY13.
Market mix
India Cement is focused on South India and
enjoys market leadership there. It has
recently diversified into North India, with a
1.5m-ton plant in Rajasthan.
Incremental volumes would be driven by the
North and the South.
In the short term, we expect South India to
be plagued by excess capacity.
Given India Cement's concentration in South
India, we expect its 4QFY11 realization to
improve by Rs8/bag QoQ.
Cost and profitability
India Cement has high dependence on
imported coal (~60%). ~30% of its
requirement is met by domestic linkage coal.
We expect its energy cost to increase by
Rs2-2.5/bag due to recent increase in
domestic coal prices.
With improvement in utilization, we expect
high operating leverage to partly offset energy
cost inflation.
We expect EBITDA/ton to improve by Rs210
QoQ in 4QFY11 to Rs829 and by Rs244 in
FY12 to Rs710.
Valuation and view
We believe the worst is over for the Indian
cement industry, especially for the southern
region, with slowdown in capacity addition.
With very high operating leverage and
relatively high gearing, India Cement would
be one of the biggest beneficiaries of an
improvement in cement prices in South India.
Possible breakdown of the cartel would be
our biggest concern.
The stock is valued at 11.8x FY12E EPS, an
EV/EBITDA of 7.1x and US$79/ton (~15.5mton
capacity). Maintain Buy, with a target price
of Rs117 (~8x FY12E EV/EBITDA).
India Cements: Light at the end of the tunnel; maintain Buy
Significant headroom to grow volumes from
current capacities: We expect volume growth
to return after de-growth in FY11. We estimate
volume CAGR of 10% over FY11-13 as against
4.9% over FY09-11. Volume growth would be
driven by demand pick-up in South India and
entry into North India. We expect capacity
utilization to improve from 65% in FY11 to 70%
in FY12 and 78% in FY13.
Diversification in North region: India
Cement is focused on South India and enjoys
market leadership there. However, with the
recent commissioning of its ~1.5m-ton plant in
Rajasthan, it has entered North India.
Incremental volumes are expected to be driven
by the North and South. In the short-term, its
performance would be largely influenced by the
South region, which is expected to be plagued
by overcapacity and muted demand.
Improvement in profitability: With recovery
in cement prices and pick-up in volumes, India
Cement's profitability would recover from the
trough of FY11. We expect profitability to
improve from Rs466/ton in FY11 to Rs710/ton
in FY12 to Rs767/ton in FY13.
India Cements: Light at the end of the tunnel; maintain Buy
Significant headroom to grow volumes from
current capacities: We expect volume growth
to return after de-growth in FY11. We estimate
volume CAGR of 10% over FY11-13 as against
4.9% over FY09-11. Volume growth would be
driven by demand pick-up in South India and
entry into North India. We expect capacity
utilization to improve from 65% in FY11 to 70%
in FY12 and 78% in FY13.
Diversification in North region: India
Cement is focused on South India and enjoys
market leadership there. However, with the
recent commissioning of its ~1.5m-ton plant in
Rajasthan, it has entered North India.
Incremental volumes are expected to be driven
by the North and South. In the short-term, its
performance would be largely influenced by the
South region, which is expected to be plagued
by overcapacity and muted demand.
Improvement in profitability: With recovery
in cement prices and pick-up in volumes, India
Cement's profitability would recover from the
trough of FY11. We expect profitability to
improve from Rs466/ton in FY11 to Rs710/ton
in FY12 to Rs767/ton in FY13.
India Cements: Levers present for re-rating
Energy security - a key differentiator: India
Cement has acquired a coal mine in Indonesia
for US$20m, with reserves of 30m tons of
5,500Kcal/kg calorific value. This mine would
give access to imported coal at a cost of US$45-
50/ton CIF (~US$30-35/ton FOB). Being high
moisture coal, it would be blended with imported
coal for usage in kiln and would also be used
directly in captive power plant. At US$140/ton
cost of imported coal and US$60/ton landed cost
of captive Indonesian coal, we estimate savings
of Rs2.1b post-tax. Further, it is setting up
120MW of CPP, which would increase its
dependence on CPP from 20% to ~80%.
IPL franchise - option value: While we do
not assign value to its IPL team, we believe it
offers option value given its success in the first
three seasons. In February 2009, owners of the
Rajasthan Royals team (winners of the first
season) sold 11.5% stake for US$16.4m, valuing
the franchise at US$140m. Based on a recent
announcement by the BCCI of a floor valuation
of US$225m for the auction of two new teams
in the IPL, India Cements' IPL franchise would
be valued at Rs38/share (~30% of market
capitalization).
India Cements: Valuation and view
We believe the worst is over for the Indian
cement industry, especially for the southern
region, with slowdown in capacity addition.
With very high operating leverage and relatively
high gearing, India Cement would be one of the
biggest beneficiaries of an improvement in
cement prices in South India.
It offers option value in the form of Indonesian
coal mine (estimated saving of Rs2.1b) and IPL
franchise (estimated at Rs38/share).
Possible breakdown of the cartel would be our
biggest concern.
The stock is valued at 11.8x FY12E EPS, an
EV of 7.1x FY12E EBITDA and US$79/ton
(~15.5m-ton capacity). Maintain Buy, with a
target price of Rs117 (~8x FY12E EV/
EBITDA).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cements: Light at the end of the tunnel; maintain Buy
Volume growth
We expect volume growth to return after degrowth
in FY11. We estimate volume CAGR
of 10% over FY11-13 as against 4.9% over
FY09-11.
Volume growth would be driven by demand
pick-up in South India and entry into North
India.
We expect capacity utilization to improve
from 65% in FY11 to 74% in FY12 and 78%
in FY13.
Market mix
India Cement is focused on South India and
enjoys market leadership there. It has
recently diversified into North India, with a
1.5m-ton plant in Rajasthan.
Incremental volumes would be driven by the
North and the South.
In the short term, we expect South India to
be plagued by excess capacity.
Given India Cement's concentration in South
India, we expect its 4QFY11 realization to
improve by Rs8/bag QoQ.
Cost and profitability
India Cement has high dependence on
imported coal (~60%). ~30% of its
requirement is met by domestic linkage coal.
We expect its energy cost to increase by
Rs2-2.5/bag due to recent increase in
domestic coal prices.
With improvement in utilization, we expect
high operating leverage to partly offset energy
cost inflation.
We expect EBITDA/ton to improve by Rs210
QoQ in 4QFY11 to Rs829 and by Rs244 in
FY12 to Rs710.
Valuation and view
We believe the worst is over for the Indian
cement industry, especially for the southern
region, with slowdown in capacity addition.
With very high operating leverage and
relatively high gearing, India Cement would
be one of the biggest beneficiaries of an
improvement in cement prices in South India.
Possible breakdown of the cartel would be
our biggest concern.
The stock is valued at 11.8x FY12E EPS, an
EV/EBITDA of 7.1x and US$79/ton (~15.5mton
capacity). Maintain Buy, with a target price
of Rs117 (~8x FY12E EV/EBITDA).
India Cements: Light at the end of the tunnel; maintain Buy
Significant headroom to grow volumes from
current capacities: We expect volume growth
to return after de-growth in FY11. We estimate
volume CAGR of 10% over FY11-13 as against
4.9% over FY09-11. Volume growth would be
driven by demand pick-up in South India and
entry into North India. We expect capacity
utilization to improve from 65% in FY11 to 70%
in FY12 and 78% in FY13.
Diversification in North region: India
Cement is focused on South India and enjoys
market leadership there. However, with the
recent commissioning of its ~1.5m-ton plant in
Rajasthan, it has entered North India.
Incremental volumes are expected to be driven
by the North and South. In the short-term, its
performance would be largely influenced by the
South region, which is expected to be plagued
by overcapacity and muted demand.
Improvement in profitability: With recovery
in cement prices and pick-up in volumes, India
Cement's profitability would recover from the
trough of FY11. We expect profitability to
improve from Rs466/ton in FY11 to Rs710/ton
in FY12 to Rs767/ton in FY13.
India Cements: Light at the end of the tunnel; maintain Buy
Significant headroom to grow volumes from
current capacities: We expect volume growth
to return after de-growth in FY11. We estimate
volume CAGR of 10% over FY11-13 as against
4.9% over FY09-11. Volume growth would be
driven by demand pick-up in South India and
entry into North India. We expect capacity
utilization to improve from 65% in FY11 to 70%
in FY12 and 78% in FY13.
Diversification in North region: India
Cement is focused on South India and enjoys
market leadership there. However, with the
recent commissioning of its ~1.5m-ton plant in
Rajasthan, it has entered North India.
Incremental volumes are expected to be driven
by the North and South. In the short-term, its
performance would be largely influenced by the
South region, which is expected to be plagued
by overcapacity and muted demand.
Improvement in profitability: With recovery
in cement prices and pick-up in volumes, India
Cement's profitability would recover from the
trough of FY11. We expect profitability to
improve from Rs466/ton in FY11 to Rs710/ton
in FY12 to Rs767/ton in FY13.
India Cements: Levers present for re-rating
Energy security - a key differentiator: India
Cement has acquired a coal mine in Indonesia
for US$20m, with reserves of 30m tons of
5,500Kcal/kg calorific value. This mine would
give access to imported coal at a cost of US$45-
50/ton CIF (~US$30-35/ton FOB). Being high
moisture coal, it would be blended with imported
coal for usage in kiln and would also be used
directly in captive power plant. At US$140/ton
cost of imported coal and US$60/ton landed cost
of captive Indonesian coal, we estimate savings
of Rs2.1b post-tax. Further, it is setting up
120MW of CPP, which would increase its
dependence on CPP from 20% to ~80%.
IPL franchise - option value: While we do
not assign value to its IPL team, we believe it
offers option value given its success in the first
three seasons. In February 2009, owners of the
Rajasthan Royals team (winners of the first
season) sold 11.5% stake for US$16.4m, valuing
the franchise at US$140m. Based on a recent
announcement by the BCCI of a floor valuation
of US$225m for the auction of two new teams
in the IPL, India Cements' IPL franchise would
be valued at Rs38/share (~30% of market
capitalization).
India Cements: Valuation and view
We believe the worst is over for the Indian
cement industry, especially for the southern
region, with slowdown in capacity addition.
With very high operating leverage and relatively
high gearing, India Cement would be one of the
biggest beneficiaries of an improvement in
cement prices in South India.
It offers option value in the form of Indonesian
coal mine (estimated saving of Rs2.1b) and IPL
franchise (estimated at Rs38/share).
Possible breakdown of the cartel would be our
biggest concern.
The stock is valued at 11.8x FY12E EPS, an
EV of 7.1x FY12E EBITDA and US$79/ton
(~15.5m-ton capacity). Maintain Buy, with a
target price of Rs117 (~8x FY12E EV/
EBITDA).
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