India Cements - Subdued quarter; prices to recover; Hold with a target price of Rs 138
India Cements' Q1 FY17 revenue slipped 2% yoy; its EBITDA rose 3% yoy due to a better operational performance. We expect both prices and volumes in the South to improve from H2, increasing utilisations. We maintain our Hold rating, with a target price of Rs. 138 (earlier Rs. 101).
Volumes rise 15% yoy. India Cements' aggregate Q1 FY17 volumes were up 14% (down 4% qoq) to 2.31m tons, as more was sold in the West and East than in previous quarters. This, together with a 3% yoy dip in realisations (up 11% qoq) to Rs. 5,173 a ton, led to the 2% yoy dip in overall revenue. Income from wind-mills and shipping were respectively Rs. 43m and Rs. 48m. The regional sales mix was Tamil Nadu & Kerala 46%, Karnataka 20%, AP & Telangana 16%, with the balance 18% in Maharashtra and the Eastern region.
EBITDA/ton betters our estimate. At Rs. 834, the EBITDA/ton (Rs. 233 a year ago, Rs. 829 the quarter before) beat our estimate due to lower operational costs. The greater use of pet-coke (now 80%) led to lower power & fuel costs (down 13%), aided by freight (down 15%) and staff cost (down 12%) yoy. Lower interest and depreciation cost counter-balanced the higher tax outgo and drop in other income, which led to an adj. PAT of Rs. 440m, down 9% yoy.
Value blocked in non-core assets. India Cements has invested considerably in unrelated non-core low-return assets, which has resulted in low returns on capital. Management is considering re-structuring, or divesting its non-core businesses and retiring debt. With no major capex ahead and good cash flows, we expect the RoE and RoCE to improve to respectively 7.6% and 10.4% by FY18.
Valuations. Our price target is Rs. 138 (6.5x FY18e EV/EBITDA). The implied valuation of the cement business is 14.8x P/E and an EV/ton of $74. We maintain a Hold. Risks. Low utilisation and intense competition.
Shares of INDIA CEMENTS LTD. was last trading in BSE at Rs.144.9 as compared to the previous close of Rs. 140.15. The total number of shares traded during the day was 1889812 in over 17181 trades.
The stock hit an intraday high of Rs. 147.45 and intraday low of 139.75. The net turnover during the day was Rs. 273430899.