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Spark Capital - India Cements 1QFY14 result review: Another weak performance; Balance sheet concerns remain;




Spark Capital Advisors(India) Private Limited


13 Aug 2013





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Another weak performance; Balance sheet concerns remain; ICEM reported weak 1QFY14 results, with a revenue growth of 3.1% y-o-y and EBITDA de-growth of 31% y-o-y. Volumes grew by 11% y-o-y to 2.65mt due to higher sales in non-South region. Realisations de-grew 6% y-o-y and flat q-o-q to Rs. 4,186/t on weak pricing scenario in its key markets and higher discounts to attract incremental volumes. Total costs/t grew 5% y-o-y to Rs. 3,614/t and down 1% q-o-q. EBITDA/t came in at Rs. 572/t v/s. Rs.1032/t in 1QFY13. PAT at Rs. 168mn de-grew by 73% y-o-y. We cut our FY14E EBITDA by 15% incorporating lower exit prices in 1QFY14. With cement prices strengthening from June in their key markets of Tamil Nadu and Andhra Pradesh, we expect volume growth to soften in the coming quarters to accommodate price hikes which could lead to a recovery in their operating margins. The stock is trading at 5x FY14E EBITDA (power and fuel cost savings incorporated), which we believe is fair with the last five years trading range was between 4-6x EBITDA for ~60% of trading days. Our SoTP based target price of Rs. 51/share is arrived based on 5.5x EV/EBITDA for their cement business at Rs. 41/share, Rs. 2/share for Trinetra Cement and Rs. 8/share for its IPL franchise. We continue to remain skeptical on ICEM’s balance sheet quality. EX-IPL target price of Rs. 43/share remains unattractive. Key takeaways from the result and our interaction with the management: Volume and price outlook:1QFY14 volumes grew by 11.3% y-o-y due to higher sales in non-South markets (24% v/s 19.6% of total volumes in 1QFY13). Southern region volumes grew by 5% while non-South volumes grew by 36% y-o-y due to higher dispatches in Maharashtra and East. We maintain our volume growth of 5% for FY14E. Cost inflation: Total costs/t in 4QFY13 grew by 5% y-o-y and down 1% q-o-q. This was led by higher freight costs, up 7% y-o-y and power & fuel up 3% y-o-y. Higher power and fuel costs/t on a y-o-y was disappointing considering the drop in imported fuel costs. Usage of Imported coal and Pet coke stood at 70% during the quarter. Phase I (25MW) CPP at Vishnupuram (AP) has been commissioned during the month of July-13 and is expected to go on full stream after stabilization of operations in two months time. The Phase II (25MW) will commence operations by September. Indonesian coal mining: First shipment of 42k tonnes of low grade coal was imported from their captive mine. This coal was used in their thermal power plants in Tamil Nadu. Capex plans and debt: Total capex ~ Rs. 3bn is budgeted for FY14E. Gross debt at ~Rs. 32bn (including sales tax deferral of Rs. 5.9bn) increased by Rs. 2bn from Mar-13 due to higher working capital requirements.

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