Poor realization and high freight expenses impacts profitability
Margins are expected to remain under pressure in FY13 and FY14 as operating
cost increases and as realization falls… But growth in volumes for the
company is expected to help going ahead
Maintain our 'Buy' rating on the stock with price target of Rs 110 as the company is
the cheapest among the frontlines in terms of asset based valuation
South India's largest cement producer India Cement posted disappointing set of numbers during
Q4FY13. Poor cement realizations during the quarter and significant rise in variable costs
resulted in the net profit missing ours as well as consensus estimates by a huge margin. The
revenue rose 7.2% Y-o-Y (10.6% Q-o-Q) to Rs 11.99 bn, while the net profit fell 59.5% Y-o-Y
(0.6% higher Q-o-Q) to Rs 263 mn.
Volumes posts decent growth while realizations remained under pressure-
The company's cement dispatches rose 7.3% Y-o-Y to 2.78 mn tonnes, while the realization
remained under significant pressure. Cement prices in company's major market of Andhra
Pradesh remained under severe pressure during the quarter, while other regions like Tamil
Nadu and Karnataka also witnessed significant price pressure. The company's gross realization
fell 1% Y-o-Y (3.5% Q-o-Q) to Rs 4213 per tonne, while the net realization (after freight expenses)
fell 6.4% Y-o-Y (5% Q-o-Q) to 3225 per tonnes.
Revenue from Shipping and IPL post impressive growth -
The shipping revenue rose 62% Y-o-Y (24% Q-o-Q) to Rs 184 mn, while the IPL revenue rose
50% Y-o-Y to Rs 3 mn. The revenue from the Windmill division stood at Rs 7 mn in Q4FY13.
Continued power holiday in Andhra Pradesh increases the power & fuel expenses-
The company witnessed severe power shortage in Andhra Pradesh, while it was not allowed to
wheel the power it generated in Tamil Nadu for the Andhra Pradesh plant, as per the Tamil
Nadu Pollution control board clearance. In Andhra Pradesh the company faces 12 days power
holiday in a month and in the remaining days four hours power cut. This caused the power
plant in Tamil Nadu to operate at lower capacity utilization, while it had to resort to costlier
grid power for its Andhra Pradesh plant. So the power cost remained elevated. Although the
company has taken various measures to improve the situation by setting up additional captive
power units, the actual fructification would take some time.
Higher freight costs impacts the margins
Recent increase in diesel prices and rail wagon rates caused the company's freight cost to
increase substantially thus impacting the margins significantly. The freight expenses as % of
sales rose nearly 400 bps Y-o-Y (100 bps Q-o-Q) to 22.9%. The EBIDTA margin thus fell 480
bps Y-o-Y (320 bps Q-o-Q) to 14.7% in Q4FY13. The absolute EBIDTA came in at Rs 1.76 bn
(19% lower Y-o-Y, 9.2% lower Q-o-Q).
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Margins are expected to remain under pressure in FY13 and FY14 as operating
cost increases and as realization falls… But growth in volumes for the
company is expected to help going ahead
Maintain our 'Buy' rating on the stock with price target of Rs 110 as the company is
the cheapest among the frontlines in terms of asset based valuation
South India's largest cement producer India Cement posted disappointing set of numbers during
Q4FY13. Poor cement realizations during the quarter and significant rise in variable costs
resulted in the net profit missing ours as well as consensus estimates by a huge margin. The
revenue rose 7.2% Y-o-Y (10.6% Q-o-Q) to Rs 11.99 bn, while the net profit fell 59.5% Y-o-Y
(0.6% higher Q-o-Q) to Rs 263 mn.
Volumes posts decent growth while realizations remained under pressure-
The company's cement dispatches rose 7.3% Y-o-Y to 2.78 mn tonnes, while the realization
remained under significant pressure. Cement prices in company's major market of Andhra
Pradesh remained under severe pressure during the quarter, while other regions like Tamil
Nadu and Karnataka also witnessed significant price pressure. The company's gross realization
fell 1% Y-o-Y (3.5% Q-o-Q) to Rs 4213 per tonne, while the net realization (after freight expenses)
fell 6.4% Y-o-Y (5% Q-o-Q) to 3225 per tonnes.
Revenue from Shipping and IPL post impressive growth -
The shipping revenue rose 62% Y-o-Y (24% Q-o-Q) to Rs 184 mn, while the IPL revenue rose
50% Y-o-Y to Rs 3 mn. The revenue from the Windmill division stood at Rs 7 mn in Q4FY13.
Continued power holiday in Andhra Pradesh increases the power & fuel expenses-
The company witnessed severe power shortage in Andhra Pradesh, while it was not allowed to
wheel the power it generated in Tamil Nadu for the Andhra Pradesh plant, as per the Tamil
Nadu Pollution control board clearance. In Andhra Pradesh the company faces 12 days power
holiday in a month and in the remaining days four hours power cut. This caused the power
plant in Tamil Nadu to operate at lower capacity utilization, while it had to resort to costlier
grid power for its Andhra Pradesh plant. So the power cost remained elevated. Although the
company has taken various measures to improve the situation by setting up additional captive
power units, the actual fructification would take some time.
Higher freight costs impacts the margins
Recent increase in diesel prices and rail wagon rates caused the company's freight cost to
increase substantially thus impacting the margins significantly. The freight expenses as % of
sales rose nearly 400 bps Y-o-Y (100 bps Q-o-Q) to 22.9%. The EBIDTA margin thus fell 480
bps Y-o-Y (320 bps Q-o-Q) to 14.7% in Q4FY13. The absolute EBIDTA came in at Rs 1.76 bn
(19% lower Y-o-Y, 9.2% lower Q-o-Q).
After providing for finance charges and tax expenses, the net profit in Q4FY13 came in 60% lower
Y-o-Y at Rs 263 mn.
The company has guided cement volume growth of 6% - 8% for FY14 and has said that the excess
capacity in the southern market would be an overhang and would take another 2-3 years to normalize.
We expect the demand to improve ahead of the general elections in 2014 and the capacity utilization
would marginally improve during this period. However we believe that the realization would remain
under pressure as a result the margins would also remain under pressure, since we believe the
operating costs would continue to remain firm due to higher power and fuel expenses and freight
cost. We see margin pressure continuing until the coal production from the company's mines in
Indonesia accelerates. We estimate the revenue and EPS for FY14 to come in at Rs 52.87 bn (14.6%
higher) and Rs 10.6 (83.8% higher).
Maintain our 'Buy' rating with target of Rs 110
The company's predominant presence in the southern market is a concern as the demand in some of
the south markets still remains poor and in the event of price fall, the southern region will witness
sharper correction than any other regions. The cement prices in the Andhra Pradesh market has shot
up sharply post the Q4FY13 results although we believe that it is not sustainable. However we maintain
our 'Buy' rating on the stock with price target of Rs 110 (EV per tonne of USD 75 - average of the
previous five year EV per tonne, PE of 10.4x and EV/EBIDTA of 5.5x FY14E earnings) as the company
is the cheapest among the frontlines in terms of asset based valuation. We see cement price falling in
the coming months, but growth in volumes will more than compensate for the price fall as the company
increases its lead distance to push volumes.
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