HIL, Scope for further margin expansion… :: ICICI Securities, PDF link

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Scope for further margin expansion…
• Revenues increased 36% YoY to | 400.0 crore led by volume growth
of 32.3% YoY (47% YoY on a like-to-like basis, i.e. excluding sales
from Raigarh unit) to 1.04 MT and realisation growth of 2.9% YoY to
| 3913/tonne
• The EBITDA margin increased to 12.6%. However, it remained
marginally lower than our estimates of 13.2%. The EBITDA/tonne
came in at | 483/tonne (vs. I-direct estimate: | 513/tonne)
• Net profit was at | 1.6 crore (vs. net loss of | 28.4 crore in Q3CY14).
The result reflects the company’s efforts are on the right path to
become operationally efficient, which would yield results over the
next two or three years
Doubling of capacity during slowdown takes toll on profitability…
Heidelberg Cement is a central regional player that contributes over
~94% of its total revenues. The company has recently doubled its cement
capacity to 6 MT from 3 MT in CY13 at a total capex of | 1570 crore.
However, due to subdued demand, these major expansions took a heavy
toll on its profitability with the company reporting a net loss of | 41 crore
in CY13 (vs. net profit of | 31 crore in CY12) led by high interest and
depreciation. It has operated at low margins of 6.3% in CY13 vs. industry
average of 18-20% due to lower cement realisation in the central region
and high operational costs due to capacity expansions.
…but operating leverage benefit, cost efficiency initiatives to lead to
healthy margin expansion, going ahead
To bring down freight costs, the company installed a conveyor belt
between its limestone reserves and clinker units, which are 20 km away
(at a cost of | 200 crore) to transport lime stones to its clinkerisation unit,
which are currently being transported by trucks. This would help the
company to achieve cost savings of about ~| 45-50/tonne. Further, to
reduce its power costs, Heidelberg is currently setting up a 13 MW waste
heat recovery plant (capex of ~| 180 crore), which will be commissioned
by early 2016E. Considering the benefit of the conveyor belt, economies
of scale coupled with better utilisation, we expect operating margins to
improve to 14.8% in CY15E and 15.4% in CY16E from 6.3% in CY13.
Improving cash flows, strong promoter back-up allay concern on high
debt; repayment to start from CY16 onwards
The company’s debt at the end of CY14 is expected to be ~| 1000 crore
with net D-E ratio of 1.2x. However, the operational turnaround as
witnessed in the last two quarters coupled with strong promoter back-up
(Heidelberg AG: world’s third largest producer) allay our concerns with
regard to its debt servicing ability.
Growth visibility in sight; maintain BUY
Given the scope for margin expansion along with better demand-supply
matrix, we expect the company to report a net profit of | 104.4 crore in
CY16E. We expect EBITDA/tonne of | 662/tonne in CY16E from
| 260/tonne in CY13. On an EV/tonne basis, the stock is trading at
$86/tonne (on capacity of 5.4 MT), which leaves scope for further upside
once its operating matrix improves fully. Hence, we remain positive on
the stock with a BUY and maintain our target price of | 105/share (i.e.
valuing at 9.5x CY16E EV/EBITDA, $100/tonne on capacity of 5.4MT).

LINK
http://content.icicidirect.com/mailimages/IDirect_Heidelberg_Q3CY14.pdf