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India Cements (ICEM)
Cement
Breaching breakeven. India Cement reported losses of Rs449 mn in 2QFY11,
marginally worse off compared to our estimate of Rs421 mn. A limited respite from
decelerating realizations further compounded by rising production cost, reduced
operating profit to a mere Rs106/ton, insufficient to service the large debt and capital
costs. We continue to maintain our SELL rating as rich valuations do not take
cognizance of the marginal price improvement in ICEM’s key markets of South India
Profitability down to Rs106/ton, insufficient to service capital costs
ICEM reported revenues of Rs8.4 bn (-15% yoy, -4% qoq), operating profit of Rs286 mn (-90%
yoy, -71% qoq) and net loss of Rs449 mn for 2QFY11, against our estimates of Rs8.6 bn, Rs179
mn and Rs421 mn, respectively. Marginally lower-than-estimated revenues were likely on account
of lower volumes of 2.7 mn tons against our estimates of 2.9 mn tons.
Higher-than-estimated raw material cost (Rs520/ton against our estimate of Rs445/ton) was on
account of lower clinker production in 2QFY11 due to stabilization problems at Chilamkur plant
and unscheduled maintenance shutdown at some other plants. The shutdown of clinker facilities
led to increased dependence on external purchases. The weak operating performance did not find
any support from non-core earnings which were down 58% yoy at Rs23 mn.
Prices in South—limited improvement so far
Prices in South declined from Rs228/bag in May 2010 to Rs187/bag in August 2010 before
bouncing back to Rs218/bag on account of sharp price hike in early September. We highlight that
price hikes in South to the tune of ~Rs20-25/bag had a limited impact on average realizations as
(1) they were made during the end of the quarter and (2) were made on the back of equivalent or
higher price correction during previous months of July and August. ICEM sells ~90% of its overall
production in South markets, where, along with Western India, pricing weakness was far more
magnified than in rest of the country. Average realizations for ICEM declined from Rs3,321/ton in
1QFY11 to Rs3,106ton in 2QFY11 (-12% yoy).
Maintain SELL rating with a revised target price of Rs90/share
We maintain our SELL rating on ICEM taking cognizance of limited price improvement in South
and expensive valuations of ICEM, and revise our target price to Rs90/share (Rs100 previously). Our
target price implies a P/E of 12.8X and EV/EBITDA of 6.4X on FY2012E earnings. ICEM is currently
trading at a P/E of 16.5X and EV/EBITDA of 7.6X on FY2012E earnings, near peak cycle multiples.
We do not currently ascribe any value to ICEM’s ownership in the IPL franchisee due to lack of
sufficient details on the financials of the cricket franchisee, though a valuation of ~US$100 mn
could translate into per share value of Rs15/share for ICEM.
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