INDIA CEMENTS Higher costs hit profitability: Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


INDIA CEMENTS
Higher costs hit profitability


􀂄 Higher input costs partly negate realisation increase
On the back of sharp recovery in cement prices in South and West regions,
realisation for India Cements (ICEM) increased 26% Q-o-Q, to INR 3,677/tonne
(against our estimate of INR 3,492/tonne). However, the commensurate
increase in EBITDA per tonne got impacted as a result of increase in operating
cost. On per tonne basis, power and fuel costs increased 18% Q-o-Q due to
higher cost of imported coal and increase in power tariffs. With overall cost per
tonne increasing by 7% Q-o-Q, EBITDA per tonne remained muted at INR
570/tonne. ICEM, however, returned to profitability with reported PAT of INR
215 mn (including gain of INR 18 mn from forex translations) against a loss of
INR 336 mn in Q2FY11 despite a volume decline of 25% Q-o-Q.

􀂄 Interest cost increase by 45% Q-o-Q
Interest cost for the company increased 45% Q-o-Q, to INR 407 mn, as a result
of higher working capital borrowings. With the company expected to raise
additional funds to redeem outstanding FCCB of USD 110 mn (due in May 2011);
meet the additional capex requirement of 50 MW CPP in Andhra Pradesh and
increased working capital requirement, interest cost is estimated to increase
further.
􀂄 No change in PAT estimates despite increase in EBITDA
With realisations for Q3FY11 coming higher than estimates and further increase
in cement prices in Q4FY11, our EBITDA stands revised upwards by 13% and
17% over the next two years. However, with estimated increase in the interest
cost, our PAT estimates remain largely unchanged.
􀂄 Additional capex of INR 2.5 bn for 50 MW CPP in Andhra Pradesh
The 50 MW CPP at ICEM’s plant in Tamil Nadu and 20 MW in Rajasthan are likely
to get commissioned by end of Q1FY12. Further, the company has placed an
order for another 50 MW CPP for its unit in Andhra Pradesh, which will get
commissioned by Q3FY13. With the Indonesian coal project awaiting
environmental clearance, 6-8 months for the actual mining to commence and
lack of visibility with regards to the landed cost, we are not factoring in the
benefits of captive coal in our estimates.
􀂄 Outlook and valuations: Long-term pain in South; maintain ‘REDUCE’
Though the current valuation of USD 79 EV/tonne FY12E appears cheap, the
huge overcapacity in South (even beyond FY13) is estimated to have a
prolonged overhang on ICEM’s earnings. We maintain our ‘REDUCE’
recommendation on the stock with ‘Sector Underperformer’ rating.


􀂄 Company Description
ICEM is a leading cement player in South India. With the recently commissioned 1.5 mn
tpa in Rajasthan, the installed capacity of the company has increased to 15.5 mn tpa.
Apart from cement, the company is also engaged in real estate, property development,
shipping (ICEM owns two vessels) and has a wind farm in Coimbatore. Also, the
company owns a cricket franchise called Chennai Super Kings in the Indian Premier
League (IPL).
􀂄 Investment Theme
We remain cautious on the southern region since it is likely to account for the bulk of all-
India additions in FY11-13. South accounts for ~80% of the current sales mix for ICEM
where YTD demand growth has been muted and industry has a huge capacity overhang.
We maintain our Reduce recommendation on the stock.
􀂄 Key Risks
Sharp increase in cement prices from current levels.
Significant decline in the power and fuel cost.