Heidelberg Cement (HEICEM) 124

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1 Result Update Rating matrix Rating : Hold Target : 135 Target Period : months Potential Upside : 9% What s Changed? Target Changed from 124 to 135 EPS FY17E Changed from 3.8 to 2.9 EPS FY18E Changed from 5.7 to 5.5 Rating Unchanged Quarterly Performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key Financials FY15*# FY16 FY17E FY18E Net Sales EBITDA Net Profit EPS ( ) *FY15 includes profit of 6.3 crore on sale of Raigarh unit # 15 montths period due to change in financial year Valuation summary FY15*# FY16 FY17E FY18E PE (x) Target PE (x) EV to EBITDA (x) EV/Tonne(US$) Price to book (x) RoNW (%) RoCE (%) Stock data Particular Amount Mcap 281 crore Debt (FY16) 154 crore Cash & Invest (FY16) 8 crore EV 3857 crore 52 week H/L 15 / 6 Equity cap crore Face value 1 Price performance (%) 1M 3M 6M 12M Heildelberg Cem India Cement JK Cement JK Lakshmi Cem Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Devang Bhatt devang.bhatt@icicisecurities.com Moderation in demand to continue February 1, 217 Heidelberg Cement (HEICEM) 124 Heidelberg Cement reported an operationally weak set of Q3FY17 numbers. Revenues (excluding excise) declined 3.7% YoY to crore (vs. I-direct estimate of crore) led by 3.7% YoY decline in volumes to 1.5 MT (vs. I-direct estimate of 1.3 MT) while realisation was flat YoY at 3,693 (below I-direct estimate of 3,87) EBITDA margin declined from 14.3% to 1.1% (below I-direct estimate of 12.3%) in Q3FY17 mainly led by a rise in employee expenses (up 11.4% YoY) and higher other expenses (up 11.1% YoY). EBITDA/tonne declined 29.5% YoY to 373/tonne (vs. I-direct estimate of 469/tonne) The company s adjusted profit was at 11.5 crore Improving macro to keep utilisation healthy During Q3FY17, cement demand was impacted by the recent demonetisation. Further, we expect demand to remain subdued in the near term due to election and sand mining issue in UP. However, in the long term, we expect cement demand to improve led by higher government spending on infra and revival in the rural economy. This coupled with absence of new capacity addition in the central region is expected to keep utilisation above 85%. Further, consolidation of cement capacity in the region is expected to bring pricing discipline in the region. Operating efficiencies to drive profitability We expect improving utilisation (from 82.% in FY16 to 9.% in FY18E) to lead to operating leverage benefit of ~ 25-3/t. Further, the 12 MW waste heat recovery plant commissioned by the company will help the company reduce power cost by ~1-2/t and lower dependence on grid power. In addition, freight cost may reduce by ~ 45-5/tonne led by installation of a conveyor belt between its limestone reserves and clinker units. Considering these benefits, we expect EBITDA/t to improve from 474/t in FY16 to 663/t in FY18E. Limited capex, healthy free cash flow to help in debt reduction With limited capex (due to no major capacity addition) and improving margins we expect the company to generate free cash flow of 35 crore over the next two years. We believe a significant portion of this will be used to reduce debt. As a result, we expect the debt to equity to decline to.7x in FY18E from 1.2x in FY16. Lack of capacity addition to keep growth muted; maintain HOLD We believe the central region was most impacted by demonetisation due to higher proportion of cash transaction in the housing segment (constitutes 65% of cement demand). We expect the impact of demonetisation to be felt in the current quarter as well. This coupled with upcoming election and sand mining issue in UP is expected keep cement demand subdued in the near term. However, from a long term prospective, revenues are expected to improve led by higher government spending and revival in rural economy. Also, we expect the EBITDA margin to improve from 12.6% to 16.3% in FY18E mainly led by cost efficiency and operating leverage benefit. Hence, although we remain positive on the stock from a long term perspective, near term challenges prompt us to maintain HOLD recommendation on the stock with a revised target price of 135 (i.e. valuing at 12x FY18E EV/EBITDA, $116/tonne on capacity of 5.4 MT). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments Net Sales Revenue decline was led by 3.7% YoY dip in volumes while realisation was flat YoY Other Incomes Raw Material Expenses Employee Expenses Change in stock NA -9.6 NA Power and fuel Freight Others EBITDA EBITDA Margin (%) bps bps Higher fixed cost led to a decline in the EBITDA margin Interest Depreciation PBT Total Tax Reported PAT PL 16.5 PL The company made a provision of 15 crore for doubtful capital advance, which led the company to report a loss at the net level Adjusted PAT Higher other income led to 29.% YoY growth in adjusted net profit Key Metrics Volume (MT) Volumes were impacted by demonetisation and election in UP Realisation ( ) 3,693 3,87 3,695. 3, EBITDA per Tonne ( ) EBITDA/tonne declined led by higher other cost/t Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 1, , ,3.5 1, We expect revenue growth to be restricted by absence of capacity expansion EBITDA EBITDA Margin (%) bps bps We expect EBITDA margin to improve led by cost rationalisation and operating leverage benefit PAT EPS ( ) Assumptions Current Earlier FY15 FY16 FY17E FY18E FY17E FY18E Comments Volume (MT) Volumes to improve from FY17E onwards led by higher infra spends Realisation ( ) 3,89 3,667 3,778 3,968 3,875 4,49 EBITDA per Tonne ( ) We expect EBITDA/tonne of 663 in FY18E ICICI Securities Ltd Retail Equity Research Page 2

3 Regional presence Others 6% Central 94% Company Analysis Substantial portion of company s revenues from central region Heidelberg Cement India sells ~94% of total cement volumes in the central region, a favourable region in India considering the demandsupply scenario. The company sells the rest of the volume in the western and southern regions. Its share in the central region had gone up from 75% to over 94% led by capacity expansion in CY13. With no major capacity addition on the cards, we believe it will likely remain a central regional player. Improving macro to keep utilisation healthy During Q3FY17, cement demand was impacted by recent demonetisation. Further, we expect demand to remain subdued in the near term due to election and sand mining issue in Uttar Pradesh. However, in the long term, we expect cement demand to improve led by higher government spending on infra and revival in rural economy. This coupled with absence of new capacity addition in the central region is expected to keep utilisation above 85%. Further, consolidation of cement capacity in the region is expected to bring pricing discipline in the region. Cost efficiency to drive margins The company doubled its cement capacity to 6 MT from 3 MT in CY13 at a total capex of 1,57 crore. However, due to subdued demand, these major expansions took a heavy toll on its profitability with the company reporting a net loss of 41 crore in CY13 (vs. net profit of 31 crore in CY12) led by high interest and depreciation. However, with improving utilisation along with stabilisation of new capacity, its margins have improved. We expect its margin to climb over 16.3% by FY18E. Exhibit 1: Revival in demand to drive utilisation CY1 CY11 CY12 CY13 FY15 FY16 FY17E FY18E Capacity (In MT) - LHS Capacity utilisation (%) - RHS Healthy free cash flow generation to help reduce debt significantly With limited capex (due to no major capacity addition) and improving margins we expect the company to generate free cash flow of 35 crore over the next two years. We believe a significant portion of this will be used to reduce debt. As a result, we expect the company s debt to equity to decline to.7x in FY18E from 1.2x in FY16. Large global promoter Heidelberg s Indian operations have the support of the rich experience of the German promoter (Heidelberg AG), a Germany-based company, which is one of the world s largest cement manufacturers with consolidated revenue of 13 billion in 215. This, we believe, would provide huge potential to grow inorganically over the longer run. ICICI Securities Ltd Retail Equity Research Page 3

4 Improvement in realisation and utilisation to drive revenues Utilisation has improved from 66.1% in CY13 to 82.4% in FY16. Going forward, we expect utilisation to further improve to 9.% in FY18E. We expect volumes to grow at a CAGR of 4.4% in FY16-18E led by increased government spending. Further, we expect pricing to improve in the central region. Consequently, we expect sales to increase at a CAGR of 8.6% over FY16-18E. Exhibit 2: Expect revenue at 1,92 crore by FY18E 2, , , , Exhibit 3: Cement capacity State Region MT Ammasandra, Tumkur Karnataka South.7 Village Imlai, Damoh Madhya Pradesh Central 2. Village Madora, Jhansi Uttar Pradesh Central 2.7 Gadab, Taluka Pen, Raigad Maharashtra West.7 Total Capacity CY12 CY13 FY15* FY16 FY17E FY18E *15 months period Exhibit 4: Volume expected at 4.8 MT by FY18E Exhibit 5: Realisation to improve in FY16-18E Million Tonnes CY12 CY13 FY15* FY16 FY17E FY18E CY12 CY13 FY15* FY16 FY17E FY18E Sales Volumes Realisation ( /tonne) -LS Growth (%) -RS Exhibit 6: Q3FY17 volume down 3.7% YoY Exhibit 7: Q3FY17 realisation flat YoY Million Tonne (%) /tonne ` Q5FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17-1 Q5FY15 Q1FY16 (%) Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Sales volumes -LHS Growth (%) -RHS Realisation-LHS Growth (%) -RHS ICICI Securities Ltd Retail Equity Research Page 4

5 Margins to improve, going forward, on economies of scale Higher utilisation and steps like overhead belt conveyor and WHRMS will drive cost downwards, going forward. Consequently, we expect margins to improve ~4 bps to 16.3% in FY18E. Exhibit 8: Expect EBITDA/tonne of 663/tonne in FY18E CY12 CY13 FY15* FY16 FY17E FY18E EBITDA/Tonne Exhibit 9: Margins to improve led by improvement in utilisation (%) CY11 CY12 CY13 FY15* FY16 FY17E FY18E EBITDA Margin (%) Exhibit 1: Q3FY17 EBITDA per tonne at 373/tonne Q5FY Q1FY16 Q2FY Q3FY Q4FY Q1FY Q2FY Q3FY17 Exhibit 11: Pick-up in margins expected, going forward, led by improvement in capacity utilisation, cost efficiency Q5FY Q1FY Q2FY16 Q3FY Q4FY Q1FY17 Q2FY Q3FY EBITDA/tonne ( ) EBITDA Margin (%) Expect sharp rebound in net profit growth by FY18E After witnessing a loss in CY13, mainly due to higher interest cost on debt due to expansion, we expect the company to report CAGR of 8% over FY16-18E. Exhibit 12: Profitability trend crore (3.) CY11 CY12 CY13 FY15* FY16 FY17E FY18E (%) Net profit - LS Net profit margin -RS ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuations We believe the central region was most impacted by demonetisation due to higher proportion of cash transaction in the housing segment (constitutes 65% of cement demand). We expect the impact of demonetisation to be felt in the current quarter as well. This, coupled with upcoming election and sand mining issue in UP, are expected keep cement demand subdued in the near term. However, from a long term perspective, revenues are expected to improve led by higher government spending and revival in rural economy. Also, we expect EBITDA margin to improve from 12.6% to 16.3% in FY18E mainly led by cost efficiency and operating leverage benefit. Hence, although we remain positive on the stock from a long term perspective, near term challenges prompt us to maintain HOLD rating on the stock with a revised target price of 135 (i.e. valuing at 12x FY18E EV/EBITDA, $116/tonne on capacity of 5.4 MT). Exhibit 13: Assumptions per tonne CY12 CY13 FY15* FY16 FY17E FY18E Sales Volume (mtpa) Net Realisation Total Expenditure Stock Adjustment Raw material Power & Fuel Employees Freight Others EBITDA per Tonne * 15 months Exhibit 14: One year forward EV/EBITDA Million $ Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 EV $115 $1 $85 $7 $55 $4 Exhibit 15: Valuation Sales Growth EPS Growth PE EV/Tonne EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) ($) (x) (%) (%) CY NA FY NA FY FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 6

7 Recommendation history vs. consensus estimate ( ) Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jul-16 Sep-16 Nov-16 Feb (%) Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date May-8 Jul-8 Oct-9 Jun-1 Feb-13 Event Board approves amalgamation of Indorama Cement and Heidelberg Cement India with Mysore Cements. Total capacity of the merged entity stands at 3.7 MTPA The Securities and Appellate Tribunal (SAT) dismisses the Securities and Exchange Board of India's (Sebi) directive on the structure of Heidelberg's open offer for Mysore Cement shares, which involved a non-compete fee for promoters. Thus, it clears the way for an open offer The board of HeidelbergCement India approves setting up of an expansion project at its plants at Damoh (Madhya Pradesh) and Jhansi (Uttar Pradesh) to increase cement production capacity from the existing 1.8 MTPA to 4.7 MTPA The board of HeidelbergCement India approves increasing the cement production at Raigad unit of the company in Maharashtra by.625 MTPA HeidelbergCement India successfully completes and commissions the expansion project at Damoh (MP). This comprises increase of clinker manufacturing capacity at its unit Narsingarh, district Damoh from 1.2 to 3.1 MTPA and increase of cement capacity at Imlai, district Damoh from 1. to 2. MTPA Feb-13 Jan-14 Feb-16 Board approves setting up of a waste heat recover based power generation plant at its clinkerisation unit at Narsingarh, district Damoh (MP). The proposed plant will produce approximately MW of power HeidelbergCement India Ltd completes the sale and transfer of its cement grinding facility at Raigad, Maharashtra to JSW Steel on a slump sale basis in accordance with business transfer agreement executed between the company and JSW Steel on October 5, 213 Commissions 12 MW WHRMS Top 1 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 1 Heidelbergcement AG 31-Dec Promoter Stewart Investors 31-Dec FII First State Investments (HK) Ltd. 31-Dec DII Life Insurance Corporation of India 31-Dec Others J.P. Morgan Asset Management (Hong Kong) Ltd. 31-Dec HDFC Standard Life Insurance Company Limited 31-Dec Birla Sun Life Asset Management Company Ltd. 31-Dec Sundaram Asset Management Company Limited 31-Dec Caisse de Depot et Placement du Quebec 31-Dec Dimensional Fund Advisors, L.P. 3-Nov Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares First State Investments (HK) Ltd Franklin Templeton Asset Management (India) Pvt. Ltd Sundaram Asset Management Company Limited.7.4 Stewart Investors Caisse de Depot et Placement du Quebec.3.2 DSP BlackRock Investment Managers Pvt. Ltd Alquity Investment Management Ltd..3.2 HDFC Standard Life Insurance Company Limited IDBI Asset Management Limited.. HSBC Global Asset Management (India) Private Limited.. Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY15* FY16 FY17E FY18E Total operating Income 2,11.2 1, ,67.1 1,92.3 Growth (%) Raw material Power & Fuel Employees Freight Others Total Operating Exp. 1, , , ,599.6 EBITDA Growth (%) Depreciation Interest Other Income Exceptional items PBT Total Tax PAT Growth (%) NA EPS ( ) Source: ICICIdirect.com Research * 15months Balance sheet Crore (Year-end March) FY15* FY16 FY17E FY18E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds ,76. Total Debt , Deferred Tax Liability Minority Interest / Others.... Total Liabilities 1, ,27.7 1, ,863.2 Assets Gross Block 2, , ,72.9 3,212.9 Less: Acc Depreciation ,74.2 1,18.8 Net Block 1, ,93.5 1, ,32.1 Capital WIP Total Fixed Assets 1, , , ,32.1 Investments.... Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Application of Funds 1, ,27.7 1, ,863.2 * 15months Cash flow statement Crore (Year-end March) FY15* FY16 FY17E FY18E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments.... (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium.... Others CF from financing activities Net Cash flow Opening Cash Closing Cash * 15months Key ratios (Year-end March) FY15* FY16 FY17E FY18E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio * 15months ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Cement) CMP M Cap EPS ( ) EV/EBITDA (x) EV/Tonne ($) RoCE (%) RoE (%) Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E ACC* Buy 27, Ambuja Cement* Buy 47, UltraTech Cem 3, Buy 11, Shree Cement 15,92 17 Hold 55, Heidelberg Cem Hold 3, India Cement Buy 5, JK Cement Buy 5, JK Lakshmi Cem Buy 4, Mangalam Cem Buy NA SFCL Hold 2, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

11 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number INH99. 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