India Cements – BUY 2QFY11 results below estimates, value emerges:: IIFL

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India Cements – BUY 2QFY11 results below estimates, value emerges

India Cements (ICL) reported a loss of Rs336m for 2QFY11,

against our expectation of a Rs201m loss, as income from IPL was
lower than our expectation (central revenue share is yet to be
accounted). Although medium-term challenges remain, we
upgrade the stock to BUY from SELL, as we believe that negatives
are fully priced in. We expect robust earnings growth in FY13,
driven by: 1) cost reduction on account of captive power meeting
60% of the total requirement, compared to nil now; and 2)
industry-beating volume growth from 2HFY12, when the recently
commissioned 1.5mtpa Rajasthan plant (60% subsidiary)
stabilises. We value the cement business at 25% discount to the
replacement cost of US$120/tonne and the IPL franchise at
US$240m (35% discount to bid for Pune franchise).


Volumes decline in 2QFY11; we expect industry-beating growth
from FY12: Cement volumes declined 3% YoY in 2QFY11, on account of
sluggish demand in the southern region. We expect volume growth to
remain muted in 2HFY11, but industry-beating growth from FY12, as its
new 1.5mtpa Rajasthan plant stabilises. We expect the market mix to
marginally improve after the Rajasthan plant has stabilised (share of
south likely to decline from the current 83% to 75%).

Cement realisation down 15% YoY: Increasing supplies caused ICL’s
cement realisation to decline sharply in 2QFY11. Cement prices in the
south have recovered on account of improved discipline. We continue to
believe that pricing discipline is unlikely to sustain, and expect prices to
decline in the quarters ahead. We factor in lower realisation for FY12
compared to the likely realisation in 3QFY11. We model higher realisation
for FY13, as we expect increasing costs for the industry to be passed on.

Margins collapse; we expect improvement from 2HFY12: EBITDA
margin declined 27pps YoY to 3.4% as cement realisation declined and
costs increased (primarily coal and freight). We expect margins to expand
from 2HFY12, as ICL is likely to commence 120MW captive power plants
over the period 1QFY12–4QFY12. We also build in a small improvement in
margins in FY13, with likely improvement in market mix. ICL is in the
process of acquiring a coal mine in Indonesia, which is likely to reduce
coal cost, but we are yet to factor this in.