Result Update Institutional Equities The India Cements 28 May 218 Reuters: ICMN.BO; Bloomberg: ICEM IN Fall In Realisation, Higher Operating Costs Hurt Performance The India Cements (ICEM) reported a weak operating performance for because of the decline in realisation. Cement volume was up 6.4% YoY at 3.9mnmt (below our estimate of 3.34mnmt). However, realisation declined 2% YoY/rose 2%QoQ to Rs4,528/tn (above our estimate of Rs4,324/tn). Effectively, revenues grew only ~4% YoY to ~Rs13.9bn (below our estimate of ~Rs14.5bn). Operating costs increased ~1.1% YoY/5.5% QoQ to Rs4,24/tn because of raw material costs and other expenditure. Limited pass-through because of weakness in key ICEM markets led to EBITDA margin compression of 291bps YoY to 11.3% YoY. Effectively, EBITDA/tn stood at Rs51/tn, down ~23.7% YoY (below our estimate of Rs573/tn). Interest expenses declined 12% YoY to Rs718mn because of credit from subsidiary payments in the prior period. Adjusted PAT stood at Rs353mn, a rise of ~3% YoY/~58% QoQ. Considering the continued weakness in operating performance, high level of debt and lack of roadmap for future growth/debt reduction, we have valued ICEM at a replacement cost of Rs4.4bn (deep discount of 4%) to arrive at its fair value. We have retained our Sell rating on ICEM with a revised target price of Rs119 (from Rs126 earlier). Volume growth in key markets: Volume increased ~6% YoY to 3.9mnmt on account of revival of demand and a lower base because of the demonetisation impact in in Andhra Pradesh, Telangana and Karnataka which offset the muted demand in Tamil Nadu and Kerala (because of sand non-availability problem in ). Realisation declined 2% YoY/rose 2% QoQ to Rs4,528/tn following higher OPC demand and supply pressure in key ICEM markets. Cost inflation and a dent in realisation impacts EBITDA margin: Energy costs (adjusted to raw material costs) rose ~5% YoY on account of high pet-coke prices. Logistics costs were flat YoY at Rs1,74/tn because of muted demand in Tamil Nadu and Kerala. However, other expenditure increased ~3% YoY to Rs2.1bn because of higher overheads, repairs and packing charges. Effectively, operating costs rose 1.1% YoY/5.5% QoQ to Rs4,24/tn. Higher operating costs and realisation decline following demand weakness in key markets (Tamil Nadu and Kerala) led to compression in EBITDA margin by 291bps YoY to 11.3%. EBITDA/tn came in at Rs51 in, declining 24% from Rs668 in. Maintain our estimates: Despite the weak performance, we have retained our earnings estimates with EPS estimates at Rs5.6/Rs7.3 for FY19/FY2, respectively. With the sand nonavailability problem largely resolved, cement demand in Tamil Nadu market is likely to normalise. This, in addition to the recovery in Andhra Pradesh and Telangana, will lead to ICEM s healthy cement despatches in FY19/FY2. However, we expect EBITDA margin to hover ~14% for the next two years because of cement over-supply in these markets, thereby keeping realisation under pressure. Additionally, ICEM s cost inflation has not been showing a significant improvement and this is likely to continue. Further, the debt level is likely to be higher, impacting the interest outgo. Outlook: We have valued ICEM stock at Rs4.5bn/mt, at a deep discount of 4% to the replacement cost of Rs7.5bn/mt to arrive at a fair value, and retained our Sell rating on it with a revised target price of Rs119 (from Rs126 earlier). This is to factor in ICEM s elevated costs impacting the operating margin, lack of roadmap for debt reduction/capacity addition to cater to incremental demand and continued high debt. At our target price, the stock trades at EV/EBITDA of 7.6x FY2E earnings. SELL Sector: Cement CMP: Rs13 Target Price: Rs119 Downside: 9% Milind Raginwar Research Analyst milind.raginwar@nirmalbang.com +91-22-6273 8172 Harshit Dhoot Research Associate harshit.dhoot@nirmalbang.com +91-22-6273 8111 Key Data Current Shares O/S (mn) 38.9 Mkt Cap (Rsbn/US$mn) 4.2/595.7 52 Wk H / L (Rs) 225/122 Daily Vol. (3M NSE Avg.) 3,41,398 Price Performance (%) 1 M 6 M 1 Yr The India Cements (1.3) (26.4) (34.5) Nifty Index (.8) 2.3 1.5 Source: Bloomberg Y/E March (Rsmn) YoY % QoQ % Net sales 13,978 13,436 4. 12,131 15.2 Operating expenses 12,392.7 11,536.3 7.4 1,458.1 18.5 EBITDA 1,585 1,917 (17.3) 1,673 (5.2) EBITDA margin (%) 11.3 14.2 (29bps) 13.8 (245bps) Other income 39 - - 37 6.8 Interest costs 718 82 (12.4) 854 (15.9) Depreciation 664 639 3.9 633 4.9 PBT 242 458 (47.) 223 8.8 Non-recurring items - - - (7) (1.) PBT (after non-recurring items) 242 458 (47.) 153 58.7 Tax (11) 115 (196.2) - Reported PAT 353 343 2.9 153 131. Adjusted PAT 353 343 2.9 223 58.4 NPM (%) 2.5 2.6 (3bps) 1.8 69bps Adjusted EPS (Rs) 1.1 1.1 2.9.7 58.4
Key conference-call takeaways ICEM s management gave industry growth guidance of 1%-15% for the southern region (including Maharashtra). In, Andhra Pradesh and Telangana grew 37% on a very weak base because of the demonetisation impact in. Karnataka & Goa/Tamil Nadu & Kerala grew 1%/4%, respectively. Demand revival is expected in Tamil Nadu and Kerala because of sand non-availability problem getting resolved. However, following competitive intensity, the management expects fluctuation in cement prices in FY19/FY2. Capacity utilisation in stood at 78% vs. 73% in and. ICEM is expecting it to improve further in 1HFY19. However, clinker capacity utilisation in FY18 was only 76%. Other expenses increased on account of higher packing charges because of the rise in prices of packaging bags (Rs7.5/bag in FY17 to Rs9/bag in FY18 and an increase of 3%-4% in itself). Further, repairs and maintenance costs (increased to Rs16mn in ) and stores and spares cost led to further addition in other expenses. Average pet-coke price in was US$11/tn, which rose to US$115/tn in 1QFY19. The tax reversal was largely due to the Sec.8I benefits available for the power plants. Gross debt of ICEM was Rs31.3bn in FY18. ICEM reduced debt of ~Rs 2bn during the quarter because of lower receivables that eased the working capital requirement. ICEM expects to repay Rs 1.5bn in FY19. Maintenance capex is expected to be ~Rs 2.bn-Rs2.5bn in FY19 and FY2, respectively. The management stated that currently there is no plan for greenfield/brownfield expansion. This will be considered in 2HFY19 based on the demand situation in 1HFY19. The management indicated that three of the company s cement plants have received environmental clearance and other approvals for further expansion. 2 The India Cements
Exhibit 1: Operational details (Rs) YoY % QoQ % E Deviation % Volume (mnmt) 3.9 2.9 6.4 2.73 13.2 3.34 (7.4) Cement realisation (net of freight) (Rs/mt) 4,525 4,62 (2.1) 4,434 2.1 4,324 4.6 Operating costs (Rs/mt) 4,24 3,978 1.1 3,814 5.5 3,766 6.8 EBITDA (Rs/mt) 51 668 (23.7) 69 (16.2) 573 (1.9) Exhibit 2: Detailed quarterly financials (Rs mn) YoY % QoQ % E Deviation % Net sales 13,978 13,436 4. 12,131 15.2 14,468 (3.4) Expenditure Change in stock (37.) (153.9) (76.) 98.5 (137.6) (22) 68.2 Raw material costs 2,535 2,294 1.5 2,227 13.8 2,718 (6.7) Purchased products - - - - - - - Power & fuel expenses 3,492 3,227 8.2 3,65 14. 3,82 (8.1) Freight costs 3,315 3,11 6.6 2,811 17.9 3,518 (5.8) Employee costs 996 993.3 764 3.4 966 3.1 Other exp 2,119 2,66 2.6 1,433 47.9 1,576 34.4 Total operating expenses 12,421 11,536 7.7 1,398 19.5 12,559 (1.1) EBITDA 1,585 1,917 (17.3) 1,673 (5.2) 1,99 (17.) EBITDA margin (%) 11.3 14.2 (291bps) 13.8 (245bps) 13.2 (186bps) Other income 39 - - 37 6.8 4 (2.) Interest costs 718 82 (12.4) 854 (15.9) 855 (16.) Depreciation 664 639 3.9 633 4.9 635 4.6 PBT 242 458 (47.) 223 8.8 459 (47.2) Non-recurring items - - - (7) (1.) - - PBT (after non-recurring items) 242 458 (47.) 153 58.7 459 (47.2) Tax (11) 115 (196.2) - - 129 (185.7) Tax rate (%) (46) 25 (281.5) - - 28 (262.5) Reported PAT 353 343 2.9 153 131. 331 6.6 Adjusted PAT 353 343 2.9 223 58.4 331 6.6 NPM (%) 2.5 2.6 (3bps) 1.8 69bps 2.3 24bps Adjusted EPS (Rs) 1.1 1.1 2.9.7 58.4 1.1 6.6 Exhibit 3: Trend in operating costs/mt Operating costs/mt(rs) YoY % QoQ % Consumption of raw material 741 77 877 362 738 836 834 853 89 9.7 (5.1) Power and fuel costs 1,45 875 864 1,7 1,113 1,76 1,11 1,124 1,131 1.7.6 Freight costs 946 1,8 1,45 1,31 1,72 1,72 1,98 1,31 1,74.1 4.1 Total costs per mt 3,815 3,68 3,844 4,461 3,978 4,14 4,9 3,814 4,24 1.1 5.5 3 The India Cements
Exhibit 4: Change in our estimates Old estimates New estimates Change (%) (Rsmn) FY19E FY2E FY19E FY2E FY19E FY2E Net sales 58,125 64,778 58,125 64,778 - - Operating profit 8,146 9,213 8,113 9,172 (.4) (.4) Net profit 1,712 2,256 1,724 2,262.7.3 EPS (Rs) 5.55 7.32 5.6 7.3.7.3 Target price (Rs) 126 119 Rating Sell Sell 4 The India Cements
4QFY15 4QFY15 4QFY15 4QFY15 4QFY15 4QFY15 Institutional Equities Exhibit 5: Volume gain on account of good demand in key markets (Rsmn) (%) 2.9 2.48 2.66 2.7 2.73 3.9 6 3.3 5 2.8 2.1 2.1 2.17 2.31 2.4 2.36 2.3 1.94 4 1.8 3 1.3 2.8 1.3 -.2 -.7 (1) -1.2 (2) Exhibit 6: Realisation decline impacts operating margin (Rsmn) (%) 5, 25 4,75 4,5 4,25 4, 3,75 3,5 2 15 1 5 (5) (1) (15) (2) Volumes (mn mt) Growth (% YoY, RHS) Realisations (Rs/mt) Growth (% YoY, RHS) Exhibit 7: Lower realisation impacts EBITDA/mt Exhibit 8: Logistics and energy expenses contribute to cost inflation (Rsmn) 1,1 1, 9 8 7 6 5 4 3 913 923 1,5 791 837 89 964 887 668 731 663 69 51 (Rsmn) (%) 5, 15 4,5 4, 1 3,5 5 3, 2,5 2, (5) 1,5 (1) 1, 5 (15) - (2) EBITDA/mt Operating costs/mt (Rs) Growth (% YoY, RHS) Exhibit 9: Freight costs continue to rise on account of high fuel prices (Rsmn) (%) 1,15 15 1,1 1,5 1, 95 9 85 1 5 (5) (1) (15) Exhibit 1: Energy costs well controlled in (Rsmn) (%) 1,4 4 1,2 3 1, 2 8 1 6 4 (1) 2 (2) - (3) Freight costs/mt (Rs) Growth (% YoY, RHS) Power & Fuel costs/mt (Rs) Growth (% YoY, RHS) 5 The India Cements
Apr-9 Aug-9 Jan-1 Jun-1 Nov-1 Mar-11 Aug-11 Jan-12 Jun-12 Oct-12 Mar-13 Aug-13 Jan-14 May-14 Oct-14 Mar-15 Aug-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Dec-17 May-18 Apr-9 Aug-9 Jan-1 Jun-1 Nov-1 Mar-11 Institutional Equities Aug-11 Jan-12 Jun-12 Oct-12 Mar-13 Aug-13 Jan-14 May-14 Oct-14 Mar-15 Aug-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Dec-17 May-18 Exhibit 11: Valuation charts EV/EBITDA (Rs) 4 35 3 25 2 15 1 5 EV/tn (Rs) 35 3 25 2 15 1 5 Price 7 1 12 14 Price $45 $6 $75 $9 $15 6 The India Cements
Financials Exhibit 12: Income statement Year ended March (Rsmn) FY16 FY17 FY18P FY19E FY2E Net sales 42,268 5,792 53,47 58,125 64,778 Growth (%) (4.4) 2.2 5.1 11.7 11.4 Operating expenses (34,55) (42,157) (46,454) (49,979) (55,565) EBITDA 7,763 8,635 6,953 8,113 9,172 Growth (%) 12.7 11.2 (19.5) 16.7 13.1 Depreciation &amortisation (2,238) (2,571) (2,559) (2,64) (2,796) EBIT 5,739 6,25 4,562 5,652 6,551 Other income 213 141 169 18 174 Interest paid (3,74) (3,65) (3,42) (3,29) (3,43) Extraordinary/Exceptional items PBT 2,3 2,61 1,161 2,362 3,121 Tax (625) (867) (179) (638) (858) Effective tax rate (%) (31) (33) (15) (27) (28) Net profit 1,378 1,734 982 1,712 2,256 Minority interest - - - - - Reported Net profit 1,378 1,734 982 1,712 2,256 Non-recurring items (32) - - - - Adjusted Net profit 1,41 1,734 982 1,712 2,256 Growth (%) 229. 23. (43.4) 75.6 31.2 Exhibit 14: Balance sheet Year ended March (Rsmn) FY16 FY17 FY18P FY19E FY2E Cash & bank balance 37 68 84 173 237 Other current assets 31,436 27,8 28,413 3,379 34,431 Investments 15,855 6,19 9,86 11,14 12,49 Net fixed assets 35,23 7,474 69,141 69,51 7,138 Goodwill & intangible assets - 533 533 533 533 Other non-current assets 553 1,388 4 31 31 Total assets 82,94 16,453 17,657 111,587 118,139 Current liabilities 18,218 21,71 14,32 22,862 24,75 Borrowings 24,52 27,15 34,419 29,285 33,493 Other non-current liabilities 4,142 6,556 6,932 6,532 6,222 Total liabilities 46,413 55,362 55,654 58,679 63,79 Share capital 3,72 3,72 3,82 3,82 3,82 Reserves & surplus 33,479 48,17 48,922 49,825 51,267 Shareholders' funds 36,491 51,91 52,3 52,97 54,349 Minority interest - - - - - Total equity & liabilities 82,93 16,453 17,657 111,587 118,139 Exhibit 13: Cash flow Year ended March (Rsmn) FY16 FY17 FY18P FY19E FY2E Pre-tax profit 2,3 2,61 1,161 2,362 3,121 Depreciation 2,617 (29,395) 2,559 2,64 2,796 Chg. in working capital (256) 6,288 (7,611) 5,831 (3,34) Total tax paid (293) 1,914 538 (185) (974) Other operating activities - - - - - Operating CF 4,71 (18,592) (3,353) 1,648 1,99 Capital expenditure (892) (6,589) (1,226) (2,55) (3,883) Chg in investments (3) 9,664 (2,896) (2,54) (1,35) Other investing activities - - - - - Investing CF (894) 3,76 (4,122) (4,64) (5,233) FCF 3,177 (15,517) (7,475) 6,44 (3,324) Equity raised/(repaid) 29 62 8 - - Debt raised/(repaid) (2,731) 3,53 7,314 (5,134) 4,28 Dividend (incl. tax) - (741) - (247) (247) Other financing activities (478) 13,174 169 (574) (574) Financing CF (3,18) 15,547 7,491 (5,955) 3,387 Net chg in cash & bank bal. (2) 3 16 9 63 Closing cash & bank bal 37 68 84 173 237 Exhibit 15: Key ratios Year ended March (Rsmn) FY16 FY17 FY18P FY19E FY2E Profitability and return ratios (%) EBITDAM 18.4 17. 13. 14. 14.2 EBITM 13.6 12.2 8.5 9.7 1.1 NPM 3.3 3.4 1.8 3. 3.5 RoE 3.9 4. 1.9 3.3 4.2 RoCE 8.7 8.3 5.1 6.2 7.2 RoIC 8.5 8.1 6.4 6.8 8. Per share data (Rs) O/s shares 37.2 37.2 37.2 37.2 37.2 EPS 4.6 5.6 3.2 5.6 7.3 FDEPS 4.6 5.6 3.2 5.6 7.4 CEPS 11.9 14. 11.5 14.2 16.4 BV 11.4 1.7 12.9 17.7 114.1 DPS 1.2 1.2.8.8.8 Valuation ratios (x) PE 28.3 23.1 4.8 23.2 17.7 P/BV 1.2 1.3 1.3 1.2 1.1 EV/EBITDA 8.2 7.8 1.7 8.5 8. EV/Sales 1.5 1.3 1.4 1.2 1.1 Other key ratios D/E (x).7.5.7.6.6 DSO (days) 44 37 43 46 49 DuPont analysis - RoE NPM (%) 3.3 3.4 1.8 3. 3.5 Asset turnover (x).5.5.5.5.6 Equity Multiplier (x) 2.3 2.2 2.1 2.1 2.1 RoE (%) 3.9 4. 1.9 3.3 4.2 7 The India Cements
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 218 Sell 141 126 28 May 218 Sell 13 119 Rating track graph 24 22 2 18 16 14 12 1 Not Covered Covered 8 The India Cements
DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 214 having Registration no. INH1436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Milind Raginwar, the research analysts and Harshit Dhoot, the research associate are the author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 9 The India Cements
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBEPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of NBEPL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBEPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBEPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBEPL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. NBEPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and noninfringement. The recipients of this report should rely on their own investigations. This information is subject to change without any prior notice. NBEPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBEPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBEPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBEPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report. Copyright of this document vests exclusively with NBEPL. Our reports are also available on our website www.nirmalbang.com Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 6273 817 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 6273 823, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 6273 81/811, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 6273 812/813, +91 22 6636 883 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : 91 22 6273 8/1; Fax. : 22 6273 81 1 The India Cements