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India Cements 3QFY12 cement net sales were in-line with our estimates
though profitability turned out better than our expectation on higher
realisations.
As far as the cement business is concerned, the stock is currently
trading at 5.5x FY12F EV/EBITDA or at 0.7x EV/IC, which is our
favoured methodology to value India Cements vs. our target EV/IC
multiple of 0.58x. In terms of EV/ton, the stock is at USD75, a discount of
38% to the replacement cost of USD120/ton. This may look cheap but
given the below cost of capital return expected to be generated by the
company of 9.5% between FY12F-FY14F, we do not find this attractive.
Highlights from conference call
The company expects the volume recovery witnessed in South India in
Nov and Dec’11 to continue and sees double-digit volume growth
continuing for the next 4-6 months
As per management, the unorganised housing sector is a key driver
for this recovery though to us this recovery appears to be too sudden
and sharp to be driven by the unorganized housing sector. In our view,
government decision making may have improved in South India
following some political stability enabling cement demand from
government-driven activities to pick up, too.
The company will likely beat our volume estimate of 9.2mnT for FY12F
but may miss our realization estimate.
The company will not be able to mine coal from its captive mine in
Indonesia in 4QFY12 due to delays in infrastructure build-out. The
Sankarnagar captive power plant of 50MW is undergoing trial runs
and, in our view, will not be able to contribute to cost curtailment in
FY12. This presents a risk to our earnings estimates for FY12 where
we had anticipated a decline in the key power and fuel costs.
Key highlights
Volumes were up 4% YoY vs. our estimate of 10.5% growth due to
lower-than-expected growth in Dec’11.
Net realizations at INR4,249/ton were up 18% YoY and down
INR42/ton QoQ, much better than our expectation of INR3,991/ton.
Income from IPL of INR40mn, ship freight of INR100mn and windmill
power of INR8.7mn for a total of INR149mn was well below our
estimate of INR527mn primarily on account of very low IPL income.
Profitability in the cement business was well above our estimates at
INR862/ton vs. our estimate of INR675/ton, driven by the higher
realization. Absolute EBITDA though missed our estimate by 3% on
lower contribution of the other businesses where combined EBITDA
was INR65mn vs. our estimate of INR411mn. EBITDA on the cement
business beat our estimate by 17%
On the cost side, power and fuel costs on a per ton basis moved up
again by 7.8% QoQ which was a surprise, driven by a higher mix of
imported coal which cost more due to the depreciation in the INR vs.
the USD during the quarter.
The positive delta though came from raw material costs which
declined 17% QoQ and vs. our estimate.
Below the EBITDA line, interest cost included a component of
exchange loss of INR137.7mn on foreign currency working capital
debt, due to depreciation in the INR vs. the USD during the quarter.
We had expected that the company would take advantage of the new
government regulation on Accounting Standard 11 whereby it could
amortize the exchange differences over the tenure of the loan. The
company has done this for long-term debt and taken the loss of
INR127.9mn on long-term foreign currency borrowings of USD60mn.
We did not anticipate the short-term foreign currency working capital
loans which resulted in the higher interest cost.
This resulted in PAT missing our estimates by 11%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cements 3QFY12 cement net sales were in-line with our estimates
though profitability turned out better than our expectation on higher
realisations.
As far as the cement business is concerned, the stock is currently
trading at 5.5x FY12F EV/EBITDA or at 0.7x EV/IC, which is our
favoured methodology to value India Cements vs. our target EV/IC
multiple of 0.58x. In terms of EV/ton, the stock is at USD75, a discount of
38% to the replacement cost of USD120/ton. This may look cheap but
given the below cost of capital return expected to be generated by the
company of 9.5% between FY12F-FY14F, we do not find this attractive.
Highlights from conference call
The company expects the volume recovery witnessed in South India in
Nov and Dec’11 to continue and sees double-digit volume growth
continuing for the next 4-6 months
As per management, the unorganised housing sector is a key driver
for this recovery though to us this recovery appears to be too sudden
and sharp to be driven by the unorganized housing sector. In our view,
government decision making may have improved in South India
following some political stability enabling cement demand from
government-driven activities to pick up, too.
The company will likely beat our volume estimate of 9.2mnT for FY12F
but may miss our realization estimate.
The company will not be able to mine coal from its captive mine in
Indonesia in 4QFY12 due to delays in infrastructure build-out. The
Sankarnagar captive power plant of 50MW is undergoing trial runs
and, in our view, will not be able to contribute to cost curtailment in
FY12. This presents a risk to our earnings estimates for FY12 where
we had anticipated a decline in the key power and fuel costs.
Key highlights
Volumes were up 4% YoY vs. our estimate of 10.5% growth due to
lower-than-expected growth in Dec’11.
Net realizations at INR4,249/ton were up 18% YoY and down
INR42/ton QoQ, much better than our expectation of INR3,991/ton.
Income from IPL of INR40mn, ship freight of INR100mn and windmill
power of INR8.7mn for a total of INR149mn was well below our
estimate of INR527mn primarily on account of very low IPL income.
Profitability in the cement business was well above our estimates at
INR862/ton vs. our estimate of INR675/ton, driven by the higher
realization. Absolute EBITDA though missed our estimate by 3% on
lower contribution of the other businesses where combined EBITDA
was INR65mn vs. our estimate of INR411mn. EBITDA on the cement
business beat our estimate by 17%
On the cost side, power and fuel costs on a per ton basis moved up
again by 7.8% QoQ which was a surprise, driven by a higher mix of
imported coal which cost more due to the depreciation in the INR vs.
the USD during the quarter.
The positive delta though came from raw material costs which
declined 17% QoQ and vs. our estimate.
Below the EBITDA line, interest cost included a component of
exchange loss of INR137.7mn on foreign currency working capital
debt, due to depreciation in the INR vs. the USD during the quarter.
We had expected that the company would take advantage of the new
government regulation on Accounting Standard 11 whereby it could
amortize the exchange differences over the tenure of the loan. The
company has done this for long-term debt and taken the loss of
INR127.9mn on long-term foreign currency borrowings of USD60mn.
We did not anticipate the short-term foreign currency working capital
loans which resulted in the higher interest cost.
This resulted in PAT missing our estimates by 11%.
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