HCIL came out with steady set of numbers which were almost in-line with our estimates on the back of improved operational performance.
While the topline was in-line with our estimates at INR 2563 mn (+23.1% YoY), bottomline was marginally below our expectations at INR 75
mn against our expectations of INR 81 mn. Realisation during the last quarter improved by 19.5% YoY outpacing the 7.8% increase in
operating cost/tn, which resulted in sharp improvement in EBIDTA margin. We recommend a BUY on the stock with a target of INR 64.
Volume & Price driven growth
HCIL reported a healthy revenue growth of 23.1% YoY to INR 2563
mn, led by volume growth of 3.1% to 0.65 mt coupled with 19.5%
improvement in cement realisations to INR 3931/tn. HCIL like all other
cement players managed to witness sharp improvement in
realisations largely due to delayed monsoons, resulting in shorter
period of seasonal decline in prices. Demand is expected to improve
going forward with the commencement of construction activities post
monsoon season, which will result in recovery in cement prices.
Sharp improvement in margins
HCIL has reported sharp improvement in EBIDTA margins to 8.3% on
the back of firm cement prices. Freight cost increased by 6.4% to INR
500/tn due to the recent 5-7% increase and levy of service tax on rail
freight. Power & Fuel cost increased by 10.3% to INR 1141/tn largely
due to ~18% surge in power tariffs to INR 6.5/unit (expected to
remain elevated for next 2-3 quarters). However with realisations
outpacing total costs, EBIDTA/tn improved to INR 317 in Q3CY12.
New capacities on track
HCIL’s new additional clinker & grinding capacities of 1.9 mtpa & 2.9
mtpa respectively are all set to commence operations from Dec 2012
onwards, which will increase its total cement and clinker capacity to
6.0 mtpa and 3.1 mtpa. This expansion is well timed as it will enable
the company to increase its market share and enjoy the economies of
scale. The company plans to sell the additional output in the markets
of UP, MP, Bihar, Delhi and NCR.
Conveyor belt to reduce transportation cost
HCIL has commissioned its new conveyor belt in Oct 2012 for
transportation of limestone from mine to its plant (~20 km), the
benefits of which will be largely seen from CY13. This coupled with
change in rail road mix from 63:37 to 50:50 would result in savings of
~INR 75-100/ton.
Demand in Central region to improve
HCIL derives ~65% of its volumes from the central region. We expect
demand in central region to grow at CAGR of more than 10% (All India
demand CAGR 8%) aided by higher growth in MP due to state
elections next year. Additionally UP is also likely to witness
improvement in demand as the newly elected government is showing
increased interest in infrastructure spending. The company is
targeting to increase its market share in MP & UP to 12% & 9%
respectively (currently ~7-8%) post the expansion.
Outlook & Valuation
Well timed capacity addition and presence in high growth central
region of UP & MP places HCIL on a superlative growth path. Doubling
of cement capacity, increased usage of pet coke from 20% to 35%
along with conveyer belt & change in rail road mix will lead to
economies of scale. With majority of capex plans almost over, return
ratios are expected to improve. Currently the stock is trading at P/BV
of 1.3x & EV/ EBIDTA of 7.6x its CY13E earnings and EV/tonne of INR
2282 its CY13E capacity. We recommend a BUY on the stock with a
revised target of INR 64 based on FY13E EV/tonne of INR 2750.
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