Company Update February 28, 2018 IN Market Cap. (Rs bn) 268 Free Float (%) 46 Shares O/S (mn) 188 In a Sweet Spot Despite Challenges is expected to witness a decent recovery in its operational performance in the backdrop of recent realisation recovery in its key markets and likely spill-over impact of reduction in fuel prices from ongoing quarter. We note that, after inducting new CEO in Feb 17, has marked a tremendous improvement in its operational efficiencies. Resultantly, its operating cost/tonne has declined by ~Rs129/tonne to Rs4,120 in last two years despite sharp upsurge in fuel prices during the period. We recent interacted with the to understand the current status of business and way forward. Below are the key takeaways:- New Capacity to Come on Stream in 2021: s capacity expansion (3mnT clinker and 5.9mnT cement) with an aggregate capex of Rs30bn funding through internal accrual commence ground breaking work in the current year. All these units (barring 2.2mnT SGU in Uttar Pradesh, as land is yet to be finalised) will be commissioned towards the mid-2021. Notably, all units in UP and Jharkhand enjoys fiscal incentives, as per states policy of the respective state governments. Incentive Declines to ~Rs1.3bn in CY18: As enjoys sales tax benefits up to on investment in 2 of its plants i.e. Chanda and Sindri SGU, its incentive value has declined to Rs1.3bn in CY18 from Rs1.5bn incy17 mainly due to implementation of GST. Hereon, expects quarterly run-rate of fiscal incentive in the range of Rs300-400mn, which can improve further in two circumstances: (a) Significant growth in Maharashtra volume; and (b) commissioning of new planned capacities in Uttar Pradesh and Jharkhand. It has already exhausted up to Rs8bn and Rs5bn sales tax fiscal incentives for Chanda and Sindri SGU, respectively till date. Expects Volume Growth in Tandem with Industry Growth: While expects its volume to improve in tandem with the industry s growth, we believe clinker constraints can impact its volume growth in the medium-term, as clinker capacity is already being utilised at >90% level. We note that average cement to clinker ratio of has been in the range of 1.5-1.55x during 2012-2017. Hence, potentially can sell up to 31.5mnT cement in case the product-mix does not change significantly. We expect s sales volume to clock 5% CAGR over CY18-CY20E. Recent Price Hike & Cost Reduction to Result in Strong Recovery in Unitary EBITDA: expects the spill-over favourable impact of reduction in fuel prices and recent up-tick in realisation should result in incremental EBITDA/tonne by ~Rs200-300/tonne in the subsequent quarters. Further, rationalisation of manpower may also result in saving to the tune of Rs30-40/ tonne. However, landed cost of slag is still prevailing higher at Rs1800/tonne due to logistics bottlenecks and supply crunch. We expect EBITDA/tonne at Rs664 and Rs726 in CY19E and CY20E, respectively as against Rs565 in CY18. Outlook & Valuation We continue to maintain our positive view on owing to its deep penetration in the rural markets (~80% trade segment volume) and consistent focus on premium products. Looking ahead, we expect its operating performance to improve led by recent up-tick in realisation in select markets. As the current valuations at 11.2x and 9.8x EBITDA of CY19E and CY20E appear to be attractive, we maintain our recommendation on the stock with an unrevised Target Price of Rs1,700 (12x CY20 EBITDA). Share price (%) 1 mth 3 mth 12 mth Absolute performance 3.3 (1.7) (13.0) Relative to Nifty 2.6 (3.1) (14.1) Shareholding Pattern (%) Sept'18 Dec'18 Promoter 54.5 54.5 Public 45.5 45.5 1 Year Stock Price Performance 1700 1650 1600 1550 1500 1450 1400 1350 1300 1250 1200 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Note: * CMP as on February 27, 2019 Key Financials (Rs mn) CY17 CY18E CY19E CY20E Sales 129,310 144,775 158,258 170,346 EBITDA 15,555 17,236 21,443 24,397 APAT 9,155 10,222 12,559 14,569 EPS (Rs) 48.7 54.4 66.8 77.5 DPS (Rs) 1.7 1.4 1.4 1.4 P/E (x) 29.2 26.2 21.3 18.4 P/B (x) 2.9 2.5 2.3 2.1 EV/EBITDA (x) 15.5 13.8 11.2 9.8 RoE (%) 10.1 15.3 11.4 12.1 Div. Yield (%) 1.2 1.0 1.0 1.0 Source: Company, RSec Research Research Analyst: Binod Modi Contact: 022 3303 4626 Email: binod.modi@relianceada.com 1
IN Healthy Traction in RMC Business: Double-digit growth in RMC volume is underpinned by strong infrastructure development activities across the country. It expects RMC volume should continue to grow in double-digit with ~10% of operating margin. In addition to this, it has recently forayed into adhesive business with products called Leakblock- Waterproofing Technology. The Company procures it from the third party and uses own branding. This business contributes very negligible revenue of ~Rs20mn/annum as on date with higher margin. Trade, Fuel and Freight Mix: Trade accounts for 80% of total sales. Petcoke, Coal and AFR account for 65%, 30% and 5%, respectively. Road and rail mix comes at 60:40. Risks to the View ff Government s failure to revive infrastructure projects. ff Significant surge in operating cost and dip in realizations. 2
IN Profit & Loss Y/E Dec (Rs mn) CY17 CY18 CY19E CY20E Net Sales 129,310 144,775 158,258 170,346 % yoy growth 20.1 12.0 9.3 7.6 Total Cost 113,755 127,539 136,815 145,950 EBITDA 15,555 17,236 21,443 24,397 EBIDTA Margin (%) 12.0 11.9 13.5 14.3 Depreciation and Amortisation 6,401 5,996 6,181 6,217 Interest 1,023 892 1,057 1,123 Other Income 4,853 4,758 4,824 5,017 PBT 12,984 15,105 19,029 22,074 Tax 3,829 (123) 6,470 7,505 % Tax 29.5 (0.8) 34.0 34.0 Net Profit 9,155 15,228 12,559 14,569 YoY Growth (%) 41.5 66.3 (17.5) 16.0 Net Profit Margin (%) 7.1 10.5 7.9 8.6 Adjusted Profit 9,155 10,222 12,559 14,569 Balance Sheet Y/E Dec (Rs mn) CY17 CY18E CY19E CY20E Share Capital 1,880 1,880 1,880 1,880 Reserves & Surplus 91,775 103,833 113,223 124,622 Total Shareholder's funds 93,655 105,713 115,103 126,502 Unsecured Loans 592 - - - Total Debt 592 - - - Deferred Tax Liability 5,414 6,631 6,631 6,631 TOTAL LIABILITIES 99,660 112,344 121,733 133,132 Gross Block 84,799 88,899 92,899 98,399 Less: Accumulated Depreciation 12,389 18,386 24,567 30,784 Net Block 72,410 70,514 68,333 67,615 CWIP 2,617 3,922 13,922 23,922 Investments 2,302 2,302 6,302 6,802 Other Non Current Assets 13,354 14,951 16,343 17,591 Inventories 14,040 16,786 16,476 17,735 Sundry Debtors 6,682 8,683 9,491 10,216 Cash & Bank 26,954 30,154 27,634 27,982 Other Current Assets 7,874 11,899 13,008 14,001 Loans & Advances 2,657 2,857 3,357 3,857 Total Current Assets 58,206 70,378 69,966 73,791 Current Liablities 47,296 47,555 50,808 54,109 Provisions 1,932 2,166 2,324 2,479 Net Current Assets 8,978 20,657 16,835 17,203 Total Assets 99,660 112,344 121,734 133,132 3
IN Cash Flow Statement Y/E Dec (Rs mn) CY17 CY18E CY19E CY20E PBT 12,984 15,105 19,029 22,074 Depreciation 6,401 5,996 6,181 6,217 Interest Paid 1,023 892 1,057 1,123 Others (1,794) - - - Operating Cash flow before WC changes 18,614 21,993 26,267 29,414 Change in Working Capital (890) (8,480) 1,303 (20) Cash Generated from Operation 17,724 13,514 27,570 29,393 Direct Tax (net) (2,177) 1,341 (6,470) (7,505) Net Cash from Operating Activities 15,548 14,855 21,100 21,888 Purchase / Sale of Fixed Assets (net) (5,194) (5,404) (14,000) (15,500) Purchase of Investment (22) - (4,000) (500) Others 983 (1,597) (1,392) (1,248) Net Cash in Investment activities (4,233) (7,001) (19,392) (17,248) Proceeds/ Repayment of LT Borrowings (net) - (592) - - Interest Paid (420) (892) (1,057) (1,123) Others (3,792) (3,170) (3,170) (3,170) Net cash in Financing activities (4,212) (4,653) (4,227) (4,292) Net inc. / (dec.) in cash & cash equivalents 7,103 3,200 (2,519) 348 Key Ratio Y/E Dec CY17 CY18E CY19E CY20E Valuation Ratio (x) P/E 29.2 26.2 21.3 18.4 P/CEPS 17.2 12.6 14.3 12.9 P/BV 2.9 2.5 2.3 2.1 EV/EBITDA 15.5 13.8 11.2 9.8 EV/Sales 1.9 1.6 1.5 1.4 EV/tonne (USD) 105 103 104 104 Dividend Payout (%) 34.9 17.3 21.0 18.1 Dividend Yield (%) 1.2 1.0 1.0 1.0 OCF Yield (%) 5.8 5.5 7.9 8.2 Per Share Data (Rs) EPS (Basic) 48.7 54.4 66.8 77.5 EPS (Diluted) 48.7 54.4 66.8 77.5 CEPS 82.7 112.9 99.7 110.6 DPS 1.7 1.4 1.4 1.4 Book Value 498 562 612 673 EBITDA/tonne 550 565 664 726 Returns (%) RoCE 14.5 15.1 17.2 18.2 RoE 10.1 15.3 11.4 12.1 Turnover ratios (x) Asset Turnover (Gross block) 1.5 1.6 1.7 1.7 Inventory (days) 39.6 42.3 38.0 38.0 Receivables (days) 18.9 21.9 21.9 21.9 Payables (days) 88.5 82.0 82.0 82.0 WCC (days) (30.0) (17.8) (22.1) (22.1) 4
IN Rating History Date Reco CMP TP 06-Feb-19 1540 1820 17-Oct-18 1540 1820 23-Jul-18 1311 1725 19-Apr-18 1571 1920 09-Feb-18 1693 1900 17-Oct-17 1792 2000 18-Jul-17 HOLD 1747 1640 21-Apr-17 HOLD 1495 1520 PLEASE CLICK HERE FOR PREVIOUS REPORTS Rating Guides Rating Expected absolute returns (%) over 12 months >10% HOLD -5% to 10% REDUCE >-5% Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website www.reliancecapital.co.in. RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014 General Disclaimers: This Research Report (hereinafter called Report ) is prepared and distributed by RSL for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value of securities referred to herein may be adversely affected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces affecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be affected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may affect the pricing of derivatives. Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/ or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India. Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers. None of RSL, research analysts, or their relatives had any known direct /indirect material conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation. RSL s Associates may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report. RSL, its Associates, the research analysts, or their relatives might have financial interest in the issuer company(ies) of the said securities. RSL or its Associates may have received a compensation from the said issuer company(ies) in last 12 months for the brokerage or non brokerage services.rsl, its Associates, the research analysts or their relatives have not received any compensation or other benefits directly or indirectly from the said issuer company(ies) or any third party in last 12 months in any respect whatsoever for preparation of this report. The research analysts has served as an officer, director or employee of the said issuer company(ies)?: No RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL. RSL s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/ strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report. Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of. RSL CIN: U65990MH2005PLC154052. SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE 231234833; BSE - INB / INF / INE 011234839, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889. 5