Healthy Performance on Firm Realisation; Maintain HOLD
India Cements (ICEM) has reported a healthy operating performance in 1QFY20 with EBITDA growing by 55% YoY and 26% QoQ to Rs2.4bn vs. our estimate of Rs2.1bn. Cement EBITDA/tonne stood at Rs752 as against Rs489 in 1QFY19 and Rs552 in 4QFY19, respectively. While average cement realisation increased by 8.6% YoY and 4% QoQ to Rs4685/tonne, sales volume de-grew marginally by 1% to 3.04mnT. Notably, cement operating cost/tonne marginally declined by 0.4% QoQ to Rs3,932 mainly led by lower input cost. A consistent increase in higher non-trade sales and tight liquidity conditions especially in the Southern states resulted in further working capital pressure on ICEM and therefore net debt increased by Rs1.1bn QoQ to Rs34.8bn. The Company opined that recent reduction in petcoke and coal prices are likely to aid its operating cost in the current quarter. However, there is no meaningful progress on capacity expansion programme and we expect it may not move faster due to its inability to de-leverage balance sheet as of now. We marginally increase our EBITDA estimate by ~3% each for FY20E and FY21E mainly to factor in recent contraction in fuel prices. However, we cut our target EV/EBITDA multiple to 6x (from 7x earlier) given continuous increase in working capital needs and absence of balance-sheet deleveraging, which may essentially lead to delay in expansion programme. We maintain HOLD recommendation on the stock with a revised Target Price of Rs94 (from Rs110 earlier).
Muted Sales Volume on Weak Demand
Election code of conduct and post election projects cancellation or re-examination (in AP) affected payment cycle and construction activities, which resulted in muted demand. Hence, ICEM’s sales volume declined by 1% YoY and 8.5% QoQ to 3.04mnT. However, revenue growth of ~9% YoY to Rs14.7bn was mainly supported by 8.6% YoY improvement in average realisation of cement. The Management expects demand to bounce back post monsoon in 2HFY20.
Improved Operating Profit on Better Realisation
A healthy realisation recovery and marginally higher-than-expected sales volume led to 55% YoY growth in EBITDA to Rs2.4bn vs. our estimate of Rs2.1bn. Cement EBITDA/tonne stood at Rs752 as against Rs489 in 1QFY19 and Rs552 in 4QFY19, respectively. While the recent drop in average realisation in its key markets is likely to impact ICEM’s operating performance in the current quarter. The Management expects pricing to recover in 2HFY20, which will aid its operating performance. We pencil its EBITDA/tonne to be at Rs677 and Rs705 in FY20E and FY21E, respectively.
Outlook & Valuations
Inability to improve its balance sheet due to consistent increase in working capital requirement on the backdrop of higher non-trade sales does not augur well for the Company, which will lead to further delay in capacity expansion. Therefore, we cut our EV to EBITDA target multiple to 6x (from 7x earlier). At CMP, the stock trades at 6.6x and 6.0x FY20 and FY21 EBITDA. We maintain our HOLD recommendation on the stock with a revised Target Price of Rs94 (6x of FY21 EBITDA).
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