India Cements :Operating results in-line, lower tax rate boosts PAT: Centrum

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Operating results in-line, lower tax rate boosts PAT
India Cements’ Q3FY12 results were in-line with our estimates on operational
parameters with Revenues at Rs9.4bn, 1.1% below our estimates of Rs9.5bn
and EBITDA at Rs1.9bn, 2.8% below our estimates of Rs2bn. The company
reported EBITDA margin of 20.7% against our estimates of 21%. However,
lower tax rate of 9.2% vs. est. 33.3% resulted in higher-than-estimated profits
of Rs563mn (est. Rs495mn). Though the despatches growth improved in Q3
in the South region (In Q3 demand grew 3.3% YoY against decline of 4.3%
reported in 9MFY12), the management believes that demand was primarily
on the back of low base effect of last year and demand by private sector
housing. Demand from infrastructure sector and government related projects
have not yet improved, as per the management, but it believes that demand
will be robust for next 4-5 months as busy construction period sets in. The
management remains confident of passing on any cost push to the
consumers. EBITDA margin of the company is expected to be in the range of
21-23% over the next two years against 12.1% in FY11. We roll forward our
valuation to FY14 and maintain Buy rating on the stock with revised price
target of 118 (earlier: Rs101), an upside of 25% from CMP.
􀂁 Higher realization and sales volume leads to improved performance:
Revenue of the company increased 20.6% YoY to Rs9.4bn driven by a) 15.8%
YoY increase in cement realization to Rs4,245/tonne and b) 7.1% YoY increase
in cement sales volume to 2.19mt. Improvement in realization and sales
volume led to 54.1% YoY growth in EBITDA and 2.6x increase in PAT to
Rs563mn.
􀂁 Increase in operating costs offset by steep increase in realization:
Operating cost for the Cement division increased 9.2% YoY to Rs3,380/tonne
due to increase in energy costs, freight cost and raw material costs. Raw
material cost increased 12% YoY to Rs584/tonne due to increase in fly ash and
gypsum price. Freight cost increased 4.9% YoY to Rs783/tonne due to increase
in railway freight charges and diesel price. Energy cost increased 7.2% YoY to
Rs1,221/tonne due to a) increase in Electricity charges by Tamilnadu and
Andhra Pradesh SEBs, b) increase in domestic coal price and c) higher usage of
imported coal in the quarter. Despite higher operating costs, EBITDA margin
improved 4.5pp YoY to 20.7% primarily driven by steep 15.8% increase in
cement realization/tonne. EBITDA/tonne of cement increased 43.8% YoY to
Rs890.
􀂁 Management remains confident of cost push to consumers: Cement price
in the South region has increased significantly over the last one year despite
low demand and ~60% utilization rate. The management remained confident
of passing on any cost increase to the consumers.
􀂁 Rolling valuations to FY14, maintain Buy: At the CMP, the stock trades at
6.8x FY14E EPS, 4.6x EV/EBITDA, and EV/tonne of US$77.8. The company is set
to benefit from commissioning of power plants (50 MW power plant in
Sankarnagar has been commissioned the trial run is going on) and coal
procurement from its mines in Indonesia. We roll forward our valuation to
FY14E and maintain Buy on the stock with revised price target of Rs118
(earlier: Rs101), an upside of 25% from CMP.