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For 3QFY2011, India Cements (INC) posted net profit of `21cr on a standalone
basis from loss of `34cr in 2QFY2011, primarily due to higher realisations owing
to the pricing discipline adopted by the cement manufacturers in the southern
region. However, dispatches declined by a steep ~24% yoy on account of the 2%
yoy de-growth in demand in the company’s key markets in the southern region.
Andhra Pradesh, which is the major cement consumer in the south, reported
demand de-growth of 15% due to the continuing political uncertainty in the state.
Going ahead, we expect demand to improve in the south with the cessation of
monsoons. Hence, we maintain a Buy on the stock.
Reports Net Profit of `21cr: For 3QFY2011, INC posted 10.6% yoy decline in
top-line to `784cr primarily due to the 11.3% decline in the cement division
revenues. However, the company’s net cement realisation improved by 20.5%
yoy during the quarter to `2,900/tone. Thus, operating margins increased by
178bp yoy to 16.4%. Consequently, INC reported net profit of `22cr, which
was an improvement qoq, but a dip of 38% yoy impacted by the steep fall in
dispatches and higher interest cost.
Outlook and Valuation: Going ahead, we expect demand to improve in the
southern region. However, excess capacity in the region would continue to be
an overhang. At the CMP, the stock is trading at EV/tonne of US $65/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 `136.
Performance of other divisions
The IPL franchisee, the shipping business and the windmill division posted
revenues of `11.5cr, `21cr and `0.9cr, respectively. On the operating front,
while the shipping division posted operating profit of `2cr, the IPL business
reported operating profit of `8cr.
Cement demand scenario in 3QFY2011
During 3QFY2011, all-India demand grew by a tepid 2% yoy. The southern region
fared poorly with de-growth of 2.2% during the quarter. The major cement
consuming state of Andhra Pradesh posted 15% de-growth in demand on a yoy
basis as against the high 24% growth witnessed in FY2010. Kerala also witnessed
de-growth of 2% in cement demand during the quarter. Tamil Nadu and
Karnataka however recorded positive growth in demand during the quarter.
Capacity expansions well on track
INC’s 1.5mtpa green-field plant at Rajasthan, through its subsidiary, Indo Zinc
commenced commercial operations during the quarter. The Tamil Nadu captive
power plant (CPP) is expected to be operational in 1QFY2012. The company is
also in the process of setting up a 50MW CPP in Andhra Pradesh., which would
commence operations in 2QFY2013. 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 August 2011. Thus, INC plans to incur total capex of
`650cr over the next two years.
Conference call highlights
INC 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. However, 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 `300-400cr to repay the FCCB’s.
The company indicated that the total capex of `650cr would be primarily
incurred towards setting up the CPP in Andhra Pradesh and coal concession
mines in Indonesia. The planned cost for the Andhra Pradesh CPP is `250cr.
Total investment for the Indonesian coal mines is estimated at ~`100cr, of
which `30cr has already been spent.
INC indicated that it would start shipping coal from the Indonesian mines by
August 2011. The maximum annual production at these mines is estimated at
~1.2mn tonnes. The company expects to utilise the coal for both its cement
operations as well the power plants amounting to ~0.8mn tonnes. The
company indicated that it might look at coal trading for the surplus capacity.
During FY2012, INC expects total dispatches from Indo Zinc at ~1mn tonnes.
Investment Arguments
Foray into northern region to reduce company’s concentration in the south:
INC, with 15.8mtpa 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 have access to northern and western regions, where it has had
limited to no presence.
Higher use of captive power to reduce energy costs: In its bid to substantially
reduce its power costs, INC is in the process of setting up the Tamil Nadu CPP,
which is expected to be operational in 1QFY2012. The company is also in the
process of setting up a 50MW CPP in Andhra Pradesh., which would
commence operations in 2QFY2013. The company has already completed the
formalities for leasing a 1,400 acre coal mine in Kalimantan, Indonesia, which
is expected to start mining operations by June 2011. The company’s
dependence on external coal would reduce substantially once the mining starts
in these mines over the next six months as indicated by management.
Outlook and Valuation
Going ahead, we expect demand to improve in the southern region. However,
excess capacity in the region would continue to be an overhang. At the CMP,
the stock is trading at EV/tonne of US $65/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 `136.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cements – 3QFY2011 Result Update
Angel Broking maintains a Buy on India Cements with a Target Price of Rs. 136.
For 3QFY2011, India Cements (INC) posted net profit of `21cr on a standalone
basis from loss of `34cr in 2QFY2011, primarily due to higher realisations owing
to the pricing discipline adopted by the cement manufacturers in the southern
region. However, dispatches declined by a steep ~24% yoy on account of the 2%
yoy de-growth in demand in the company’s key markets in the southern region.
Andhra Pradesh, which is the major cement consumer in the south, reported
demand de-growth of 15% due to the continuing political uncertainty in the state.
Going ahead, we expect demand to improve in the south with the cessation of
monsoons. Hence, we maintain a Buy on the stock.
Reports Net Profit of `21cr: For 3QFY2011, INC posted 10.6% yoy decline in
top-line to `784cr primarily due to the 11.3% decline in the cement division
revenues. However, the company’s net cement realisation improved by 20.5%
yoy during the quarter to `2,900/tone. Thus, operating margins increased by
178bp yoy to 16.4%. Consequently, INC reported net profit of `22cr, which
was an improvement qoq, but a dip of 38% yoy impacted by the steep fall in
dispatches and higher interest cost.
Outlook and Valuation: Going ahead, we expect demand to improve in the
southern region. However, excess capacity in the region would continue to be
an overhang. At the CMP, the stock is trading at EV/tonne of US $65/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 `136.
Operating performance
During the quarter, INC dispatched 2.04mn tonnes of cement, a decline of
23.6% yoy. However, net cement realisations improved by ~20.3% yoy to
`2,900/tonne due to the pricing discipline adopted by the players. Freight cost
per tonne increased 6.8% yoy `702 due to higher diesel costs. Operating
profit per tonne of cement stood at `585, up 33.2% yoy. Net Profit per tonne
stood at `74.
Performance of other divisions
The IPL franchisee, the shipping business and the windmill division posted
revenues of `11.5cr, `21cr and `0.9cr, respectively. On the operating front,
while the shipping division posted operating profit of `2cr, the IPL business
reported operating profit of `8cr.
Cement demand scenario in 3QFY2011
During 3QFY2011, all-India demand grew by a tepid 2% yoy. The southern region
fared poorly with de-growth of 2.2% during the quarter. The major cement
consuming state of Andhra Pradesh posted 15% de-growth in demand on a yoy
basis as against the high 24% growth witnessed in FY2010. Kerala also witnessed
de-growth of 2% in cement demand during the quarter. Tamil Nadu and
Karnataka however recorded positive growth in demand during the quarter.
Capacity expansions well on track
INC’s 1.5mtpa green-field plant at Rajasthan, through its subsidiary, Indo Zinc
commenced commercial operations during the quarter. The Tamil Nadu captive
power plant (CPP) is expected to be operational in 1QFY2012. The company is
also in the process of setting up a 50MW CPP in Andhra Pradesh., which would
commence operations in 2QFY2013. 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 August 2011. Thus, INC plans to incur total capex of
`650cr over the next two years.
Conference call highlights
INC 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. However, 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 `300-400cr to repay the FCCB’s.
The company indicated that the total capex of `650cr would be primarily
incurred towards setting up the CPP in Andhra Pradesh and coal concession
mines in Indonesia. The planned cost for the Andhra Pradesh CPP is `250cr.
Total investment for the Indonesian coal mines is estimated at ~`100cr, of
which `30cr has already been spent.
INC indicated that it would start shipping coal from the Indonesian mines by
August 2011. The maximum annual production at these mines is estimated at
~1.2mn tonnes. The company expects to utilise the coal for both its cement
operations as well the power plants amounting to ~0.8mn tonnes. The
company indicated that it might look at coal trading for the surplus capacity.
During FY2012, INC expects total dispatches from Indo Zinc at ~1mn tonnes.
Investment Arguments
Foray into northern region to reduce company’s concentration in the south:
INC, with 15.8mtpa 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 have access to northern and western regions, where it has had
limited to no presence.
Higher use of captive power to reduce energy costs: In its bid to substantially
reduce its power costs, INC is in the process of setting up the Tamil Nadu CPP,
which is expected to be operational in 1QFY2012. The company is also in the
process of setting up a 50MW CPP in Andhra Pradesh., which would
commence operations in 2QFY2013. The company has already completed the
formalities for leasing a 1,400 acre coal mine in Kalimantan, Indonesia, which
is expected to start mining operations by June 2011. The company’s
dependence on external coal would reduce substantially once the mining starts
in these mines over the next six months as indicated by management.
Outlook and Valuation
Going ahead, we expect demand to improve in the southern region. However,
excess capacity in the region would continue to be an overhang. At the CMP,
the stock is trading at EV/tonne of US $65/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 `136.
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