India Cements' Q1FY13 result was above our estimates with revenues at Rs12bn (est. Rs11.2bn), EBITDA at Rs2.8bn (est. Rs2.3bn) and op. margin at 23.1% (est. 20.7%). The reason for better performance was primarily higher cement realization (Rs4,439/tonne vs. est. Rs4,386/tonne) and higher income from IPL (Rs1,220mn vs. est. Rs900mn). Adjusted profit of the company was at Rs936mn (est. Rs858mn). Higher-than-expected increase in realization led to EBITDA/tonne of Rs1,029 against our estimate of Rs959/tonne. Though, utilization rate in the South region continues to remain sluggish, manufacturers have been able to pass on cost hikes to consumers and improve their op. margins. Price in the South region has increased by Rs10-20/bag in last one month and the current price is ~1% higher than the average price in Q1FY13. We believe that higher realization in the region would result in improved profitability for manufacturers and expect EPS of India Cements to increase by 36.5%/13.3% to Rs12.2/Rs13.8 in FY13E/FY14E. RoE of the company is expected to improve to 10.9% in FY15E against 6.9% in FY12 (RoE was 1.9% in FY11). We maintain Buy on the stock with a target price of Rs118 (upside of 39% from CMP).
Higher realization and sales volume lead to improved performance and help beat estimates: Revenue of the company increased 13.7% YoY to Rs12bn (est. Rs11.2bn) driven by a) 7.7% YoY increase in cement realization to Rs4,466/tonne (est. Rs4,386/tonne) and b) 2.9% YoY increase in cement sales volume to 2.38mt. Improvement in realization and sales volume led to 14.9% YoY growth in EBITDA to Rs2.8bn (est. Rs2.3bn) and EBITDA margin improved 25bps YoY to 23.1% (est. 20.7%). EBITDA/tonne of cement increased 4.6% YoY (and 25.3% QoQ) to Rs1,029/tonne.
However, higher interest cost and tax rate led to decline in profits: Interest cost of the company increased 20% YoY to Rs699mn (adjusted for Rs250.2mn related to losses on foreign exchange translations). Tax rate during the quarter was at 24.8% against 16.4% in Q1FY12. Higher interest cost and tax rate led to 10.4% decline in adjusted profit to Rs936mn.
Increase in operating costs offset by steep increase in realization: Operating cost for the Cement division increased 8.6% YoY to Rs3,437/tonne due to an increase in power & fuel cost, freight cost and employee expenses. Employee expense increased by 20.2% YoY to Rs331/tonne, freight cost by 20.2% YoY to Rs937/tonne due to increase in railway freight charges and diesel price. Power & fuel cost increased 17.2% YoY to Rs1,210/tonne due to a) increase in electricity charges by Tamilnadu and Andhra Pradesh SEBs and b)increase in domestic coal price.
Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.2x FY14E EPS, 3.7x EV/EBITDA and EV/tonne of US$71.4. With improvement in realization, EPS of the company is expected to increase by 36.5%/13.3% to Rs12.2/Rs13.8 in FY13E/FY14E. RoE of the company is expected to improve to 10.9% in FY15E against 6.9% in FY12 (RoE was 1.9% in FY11). The company will also benefit from commissioning of power plants and coal procurement from its mines in Indonesia. We maintain Buy on the stock with a price target of Rs118.
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