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India Cements’ (ICEM IN, Mkt Cap US$799m, CMP Rs116, Buy)
Revenues de-grew 15% YoY (~4.5% QoQ) to Rs8.4b , Volumes de-grew 2.7% YoY (~2.1% QoQ growth) to 2.72mt , EBITDA of Rs286m (vs est Rs400m loss)
With very high operating leverage and relatively high gearing, India Cement would be one of the biggest beneficiaries of improvement in cement prices in South India.
The stock is valued at 15.4x FY12 EPS (fully diluted, ex-treasury stock), 7.5x FY12E EBITDA and US$77/ton (at 15.5mt capacity). Valuations are attractive
considering bottom of the cycle earnings. Maintain Buy with target price of Rs142 (~US$88/ton FY12 capacity – 20% discount to replacement cost).
Acquired coal mine would reduce exposure to volatility in energy prices
It acquired coal mining rights in Indonesia to meet its coal requirements. The said mine
has reserves of 30mt of coal with 5,700 Kcal/kg. Its investment in this mine is ~US$20m
and would give access to imported coal at cost of US$45-50/ton FOB. It expects to start
using coal from Indonesian mine from Mar-11 (v/s Dec-10 earlier).
In first full year of operation, it would be mining ~60k tons/month and then ramp-up later
(current requirement of ~80k tons/month of imported coal). This coupled with two ships
acquired last year, would significantly reduce its exposure to volatile energy price and
shipping freight. Further, its on-going addition of 100MW CPP (expected commissioning
in 2HCY11) would increase its dependence on CPP from current 15% to ~75%.
Demand outlook remains challenging, however good pricing discipline to
drive recovery
The management indicated that the demand outlook in South India is challenging with
key markets of Andhra Pradesh and Karnataka not showing any signs of improvement.
Cement volumes in South India grew just by 2% in 2QFY11, with 4% decline in
volumes in Andhra Pradesh. The management doesn't expect cement demand in south
India to improve before Mar-Apr'11.
Muted demand coupled with excess capacities has resulted in utilization rate in South
India dropping to ~68-70%. While fully expanded capacity is estimated at 110mt, total
dispatches (incl supplies to natural markets of West) would be 73-74mt.
However, it is hopeful that the current arrangement on production discipline will sustain
in the foreseeable future as cash losses witnessed by the manufacturers have made
them saner. As a result, cement prices in South India have recovered and higher by
~Rs25/bag than 2QFY11 average. Based on current prices, we estimate its EBITDA/
ton to recover to Rs550-600/ton.
Other takeaways from the conference call
It has commissioned its Rajasthan plant with capacity of 1.5mt. This plant is in its
subsidiary Indo-Zinc in which it currently has 60% stake. It plans to increase stake to
~90%. This plant would have a 20MW CPP. The feedstock for kiln and CPP would
be imported coal.
It plans to repay US$75m FCCB (convertible at Rs305.6 by May-11) by raising debt
and not equity.
It has capex plans of Rs11b over FY11-13 for investment in capacity addition at
Rajasthan plant, CPP and investment in Indonesian coal mine. It has already invested
Rs4-5b in 1HFY11.
It has gross debt of Rs29b and cash & cash equivalents of Rs1b.
Upgrading estimates
We are upgrading our estimates for FY11 by 33% to Rs4 and FY12 by 8.7% to Rs7.5, to
factor in for improvement in cement prices in South India. Our key assumptions are:
Volumes of 11.3mt (v/s 12mt earlier) for FY11 and 12.7mt (v/s 13.8mt earlier) to
reflect for production discipline.
Realizations improvement of Rs22/bag QoQ in 3QFY11 and Rs5/bag in 4QFY11. For
FY12, we assume Rs8/bag average increase in FY12 over FY11.
Valuation and view
With demand in South India remains muted, we believe worst pricing scenario is behind
us. We expect prices to volatile driven by seasonality and changes in cartel. However, we
do not expect prices to correct as much as in 1HFY11. Pace of capacity addition in South
India is expected to slowdown, as only ~10-12mt of new capacities expected to commence
operations over next 18 months (v/s 30mt commissioning operations in last 18 months).
With very high operating leverage and relatively high gearing, India Cement would be one
of the biggest beneficiaries of improvement in cement prices in South India. Break-down
in cartel would be the biggest concern. The stock is valued at 15.4x FY12 EPS (fully
diluted, ex-treasury stock), 7.5x FY12E EBITDA and US$77/ton (at 15.5MT capacity).
Valuations are attractive considering bottom of the cycle earnings. Maintain Buy with
target price of Rs142 (~US$88/ton FY12 capacity - 20% discount to replacement cost).
We assume IPL revenues of Rs900m (v/s Rs1.1b earlier; v/s Rs471m in 1HFY11) in
FY11 and Rs1.1b in FY12 (unchanged).
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