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India Cements – 2QFY2011 Result Update
Angel Broking maintains a Buy on India Cements with a Target Price of Rs139.
India Cements (INC) posted net loss of `45cr primarily due to the substantial
~26% yoy decline in net cement realisation (adjusted for freight) to
`2,230/tonne. Realisation plunged due to the significant fall in prices in the
southern region, which accounts for 80-85% of the company’s cement
revenues. However, going ahead, we expect INC’s profitability to improve on
better demand and higher realisations. We maintain a Buy on the stock.
Operating profit dips 90% yoy to `30cr: INC’s 2QFY2011 net sales
de-grew 15.3% yoy to `843cr in line with our estimates, due to the substantial
decline in cement realisations. However, cement despatches grew by a
modest 7.9% yoy to 2.71mn tonnes. INC’s IPL and shipping businesses
posted revenues of `11cr and `34cr, respectively. On the operating front,
OPM fell by 2,675bp yoy to 3.6% (30.3%) due to the fall in realisations and
increase in coal (up 40% yoy to `5,869/tonne), fly ash and freight costs.
During the quarter, the company reported forex gain of `11.3cr, paring
losses to a certain extent.
Outlook and Valuation: The recent price hike carried out by INC along with
other cement players has seen realisations improving in 3QFY2011. Going
ahead, the demand situation is also expected to improve in the south and aid
price recovery. However, excess capacity in the region would continue to be
an overhang. At the CMP, the stock is trading at EV/tonne of US $76/tonne
based on FY2012E capacity, which is at a substantial discount to its peers. We
maintain a Buy on the stock, with a SOTP-based Target Price of `139.
Cement demand scenario in 2QFY2011
During 2QFY2011, all-India demand grew 5% yoy. The eastern region reported
growth of 13% yoy, while the southern region posted 2% yoy growth. The major
cement consuming region of south Andhra Pradesh posted de-growth on yoy basis
as against the high 24% growth posted last year.
Capacity expansions well on track
INC’s 1.5mtpa green-field plant at Rajasthan, through its subsidiary, Indo Zinc has
commenced operations. The company is also in the process of setting up two
captive power plants (CPPs) of 50MW each in Tamil Nadu and Andhra Pradesh.
While the Tamil Nadu plant is expected to be operational in 1QFY2012, the
Andhra Pradesh plant is expected to commence operations in 4QFY2012. The
company has also completed formalities for obtaining the coal mining rights in
Indonesia to meet its coal requirements for power generation and cement
manufacturing. The supply of coal from these mines is expected to commence in
March 2011. Thus, INC plans to incur total capex of `1,100cr over the next two
years.
Conference call highlights
INC intimated that it would increase its stake in subsidiary, Indo-Zinc, from the
current 69%, but not exceeding 90%.
The company has US $75mn of FCCB’s outstanding in its books, issued at a
conversion price of `350/share. These FCCB’s are due for conversion/repayment
in May 2011. With the current market price way below the conversion price, the
company would have to repay the FCCB’s along with interest resulting in total
out-go of US $120mn. Management has indicated that it is looking at raising
close to `300-400cr to repay the FCCB’s.
Investment Arguments
Foray into northern region to reduce company’s concentration in the south:
INC, with 14mtpa capacity, is the second largest cement player in the south
with a market share of close to 19%. Currently, the southern region is
witnessing a decline in prices due to excess supply and slow-down in demand.
The company has forayed into the northern region with the commissioning of
the 1.5mtpa green-field plant at Rajasthan, which is expected to reduce its
exposure to the southern region. Post commencement of this new plant, the
company will be able to cater to northern and western regions, where it has
had limited to no presence.
Higher use of captive power to reduce energy costs: The company is also in
the process of setting up two captive power plants (CPPs) of 50MW each in
Tamil Nadu and Andhra Pradesh in a bid to substantially reduce its power
costs. The EPC order has been finalised for the Tamil Nadu plant and is
expected to be completed by 1QFY2012. The company has already completed
the formalities for leasing a 1,400 acre coal mine in Kalimantan, Indonesia
and is expected to start mining by March 2011. The company’s dependence
on external coal would reduce substantially once the mining starts in these
mines over the next 5-6 months as indicated by management.
Outlook and Valuation
The recent price hike carried out by INC (along with other cement players) has
seen realisations improving in 3QFY2011. Going ahead, the demand
situation is also expected to improve in the south and aid price recovery.
However, excess capacity in the region would continue to be an overhang. At
the CMP, the stock is trading at EV/tonne of US $76/tonne based on FY2012E
capacity, which is at a substantial discount to its peers. We maintain a Buy on
the stock, with a SOTP-based Target Price of `139.
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