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India Cements (ICEM)
Cement
Upgrade to ADD noting reasonable valuations. We upgrade India Cements (ICEM)
to ADD (from REDUCE previously) as its current valuation offers a favorable risk-reward
ratio based on benign earnings assumptions, the weakness in demand environment and
capacity overhang notwithstanding. In our view, the sustenance of the current pricing
discipline could allow ICEM to overcome rising cost and an overall weak demand
environment. Maintain price target of Rs82/share offering 22% upside to CMP.
Demand environment looks challenging in the near term, though FY2013E could be a lot better
ICEM has underperformed the benchmark BSE-30 index by 14% in the past three months as
against a relative outperformance of 10% by our cement coverage universe, thus reflecting the
challenging business environment in South India. We do concede that the operating environment
in South India remains challenging in the near term given the negative growth and fragmented
nature of Southern markets though we highlight the strong pricing discipline maintained by
market participants.
We note that pressures from incremental capacity addition will likely recede as capacity addition
over the next few three years is a meager 57 mtpa against 95 mtpa added over the past five,
which, if coupled with a revival of demand, could allow for sustenance of the current market
discipline.
Realizations drive strong outperformance, pricing discipline sustains
ICEM reported revenues of Rs10.6 bn (20% yoy, 6% qoq), operating profit of Rs2.4 bn (142%
yoy, 35% qoq) and net income of Rs1.1 bn (189% yoy, 94% qoq) for 1QFY1 beating both street
as well as our own estimates. Strong outperformance was driven by 19% higher-than-estimated
average realizations (Rs4,573/ton against our estimate of Rs3,842/ton) despite weaker volumes
and rising input costs.
Upgrade to ADD on attractive valuations and limited risk to our estimates.
We upgrade ICEM to ADD (from REDUCE) noting attractive valuations of US$90/ton on FY2013E
production, US$63/ton on FY2013E capacity (as against replacement cost of US$110-120/ton) and
5X FY2013E EBITDA. Our earnings estimates factor in declining volume growth and a weakening
price trend taking cognizance of potential earning pitfalls. In our view, consensus estimates will
likely be revised upwards significantly, as earnings of 1QFY12 meets 49% of revised full-year
consensus estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cements (ICEM)
Cement
Upgrade to ADD noting reasonable valuations. We upgrade India Cements (ICEM)
to ADD (from REDUCE previously) as its current valuation offers a favorable risk-reward
ratio based on benign earnings assumptions, the weakness in demand environment and
capacity overhang notwithstanding. In our view, the sustenance of the current pricing
discipline could allow ICEM to overcome rising cost and an overall weak demand
environment. Maintain price target of Rs82/share offering 22% upside to CMP.
Demand environment looks challenging in the near term, though FY2013E could be a lot better
ICEM has underperformed the benchmark BSE-30 index by 14% in the past three months as
against a relative outperformance of 10% by our cement coverage universe, thus reflecting the
challenging business environment in South India. We do concede that the operating environment
in South India remains challenging in the near term given the negative growth and fragmented
nature of Southern markets though we highlight the strong pricing discipline maintained by
market participants.
We note that pressures from incremental capacity addition will likely recede as capacity addition
over the next few three years is a meager 57 mtpa against 95 mtpa added over the past five,
which, if coupled with a revival of demand, could allow for sustenance of the current market
discipline.
Realizations drive strong outperformance, pricing discipline sustains
ICEM reported revenues of Rs10.6 bn (20% yoy, 6% qoq), operating profit of Rs2.4 bn (142%
yoy, 35% qoq) and net income of Rs1.1 bn (189% yoy, 94% qoq) for 1QFY1 beating both street
as well as our own estimates. Strong outperformance was driven by 19% higher-than-estimated
average realizations (Rs4,573/ton against our estimate of Rs3,842/ton) despite weaker volumes
and rising input costs.
Upgrade to ADD on attractive valuations and limited risk to our estimates.
We upgrade ICEM to ADD (from REDUCE) noting attractive valuations of US$90/ton on FY2013E
production, US$63/ton on FY2013E capacity (as against replacement cost of US$110-120/ton) and
5X FY2013E EBITDA. Our earnings estimates factor in declining volume growth and a weakening
price trend taking cognizance of potential earning pitfalls. In our view, consensus estimates will
likely be revised upwards significantly, as earnings of 1QFY12 meets 49% of revised full-year
consensus estimates
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