India Cements :Higher realization leads to improved performance :Centrum

Higher realization leads to improved performance
India Cements’ Q1FY13 result was above our estimates with revenues at
Rs12bn (est. Rs11.2bn), EBITDA at Rs2.8bn (est. Rs2.3bn) and op. margin at
23.1% (est. 20.7%). The reason for better performance was primarily higher
cement realization (Rs4,439/tonne vs. est. Rs4,386/tonne) and higher income
from IPL (Rs1,220mn vs. est. Rs900mn). Adjusted profit of the company was at
Rs936mn (est. Rs858mn). Higher-than-expected increase in realization led to
EBITDA/tonne of Rs1,029 against our estimate of Rs959/tonne. Though,
utilization rate in the South region continues to remain sluggish,
manufacturers have been able to pass on cost hikes to consumers and
improve their op. margins. Price in the South region has increased by Rs10-
20/bag in last one month and the current price is ~1% higher than the
average price in Q1FY13. We believe that higher realization in the region
would result in improved profitability for manufacturers and expect EPS of
India Cements to increase by 36.5%/13.3% to Rs12.2/Rs13.8 in FY13E/FY14E.
RoE of the company is expected to improve to 10.9% in FY15E against 6.9% in
FY12 (RoE was 1.9% in FY11). We maintain Buy on the stock with a target
price of Rs118 (upside of 39% from CMP).
Higher realization and sales volume lead to improved performance and
help beat estimates: Revenue of the company increased 13.7% YoY to
Rs12bn (est. Rs11.2bn) driven by a) 7.7% YoY increase in cement realization to
Rs4,466/tonne (est. Rs4,386/tonne) and b) 2.9% YoY increase in cement sales
volume to 2.38mt. Improvement in realization and sales volume led to 14.9%
YoY growth in EBITDA to Rs2.8bn (est. Rs2.3bn) and EBITDA margin improved
25bps YoY to 23.1% (est. 20.7%). EBITDA/tonne of cement increased 4.6% YoY
(and 25.3% QoQ) to Rs1,029/tonne.
However, higher interest cost and tax rate led to decline in profits:
Interest cost of the company increased 20% YoY to Rs699mn (adjusted for
Rs250.2mn related to losses on foreign exchange translations). Tax rate during
the quarter was at 24.8% against 16.4% in Q1FY12. Higher interest cost and
tax rate led to 10.4% decline in adjusted profit to Rs936mn.
Increase in operating costs offset by steep increase in realization:
Operating cost for the Cement division increased 8.6% YoY to Rs3,437/tonne
due to an increase in power & fuel cost, freight cost and employee expenses.
Employee expense increased by 20.2% YoY to Rs331/tonne, freight cost by
20.2% YoY to Rs937/tonne due to increase in railway freight charges and
diesel price. Power & fuel cost increased 17.2% YoY to Rs1,210/tonne due to a)
increase in electricity charges by Tamilnadu and Andhra Pradesh SEBs and b)
increase in domestic coal price.

�� Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.2x
FY14E EPS, 3.7x EV/EBITDA and EV/tonne of US$71.4. With improvement in
realization, EPS of the company is expected to increase by 36.5%/13.3% to
Rs12.2/Rs13.8 in FY13E/FY14E. RoE of the company is expected to improve to
10.9% in FY15E against 6.9% in FY12 (RoE was 1.9% in FY11). The company will
also benefit from commissioning of power plants and coal procurement from
its mines in Indonesia. We maintain Buy on the stock with a price target of
Rs118.