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Spark Capital: India Cements 2QFY13 results review - Weak operating performance; Balance sheet concerns remain; Downgrade to ADD




Spark Capital Advisors(India) Private Limited


06 Nov 2012





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Weak operating performance; Balance sheet concerns remain; Downgrade to ADD ICEM reported weak 2QFY13 results, with a revenue growth of 3% y-o-y and EBITDA de-growth of 19% y-o-y. Volumes grew by 3.5% y-o-y to 2.51mt. Realisations grew by 3% y-o-y, but de-grew by 2% to Rs. 4,355/t due to weak prices in AP. EBITDA/t de-grew by 13% y-o-y to Rs. 768/t on higher costs and lower realisation growth. Interest costs of Rs. 667mn includes Rs. 100mn on MTM forex gain. PAT at Rs. 491mn de-grew by 30% y-o-y. We lower our FY13E and FY14E EBITDA estimate by 4% and 2% respectively on volume downgrade and factoring in higher costs. ICEM has rallied ~30% over the last five months and at CMP, it is trading at ~5x FY14E EBITDA. We see limited upside from here and hence downgrade the stock from BUY to ADD with a target price of Rs. 108/share (earlier Rs. 110), valuing cement business at 6x FY14E EV/EBITDA, which is ~10% discount to its six year average multiple of ~6.8x. We continue to remain skeptical on ICEM’s balance sheet (Refer our Annual Report Analysis note) and its foray into infra business. Key takeaways from the result and our interactions with the management: Volume outlook: ICEM’s 2QFY13 and 1HFY13 volumes grew by a muted 3% y-o-y. ICEM is guiding for volumes of ~9.5-10mt, implying a flat to 5% growth on a low base. We keep our volume estimates at the lower end of their guidance of 9.5mt for FY13E and 5% growth for FY14E. Price outlook: ICEM’s realisation grew 3% y-o-y to Rs. 4,355/t. 2HFY13 realisations are up 5% y-o-y a. As a result of this and retracement in cement prices in AP from the lows, we estimate FY13E realisation growth of ~6%. Cost inflation led by power costs: Costs rose 8% y-o-y and 5% q-o-q to Rs. 3,587/t. Power and fuel costs rose sharply by 17% y-o-y and 8% q-o-q, despite weakening imported coal prices and appreciating rupee. This was mainly due to 12day power holiday in AP, which resorted them purchase high cost power from the open market. Status of Indonesian coal mining: As per the management, the company has commissioned its coal mining operations in Indonesia by raising ~15-20k tonnes of coal and expect the first shipment by 4QFY13. We do not factor any cost savings from captive coal usage in CPPs at this point of time. Capex plans and debt: ICEM is planning for a capex of Rs. 5.5bn over the next two years on 48MW CPP in AP, a ship, coal mining and maintenance capex. Gross debt increased from 27bn in Mar-12 to Rs. 31bn in Sep-12, of which Rs. 1.48bn due to increase in loans and advances. IPL: Revenues was Rs. 52mn, while EBITDA came in at a loss of Rs. 40mn.

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