: price: EPS: Another weak quarter; Maintain SELL ICEM reported weak 2QFY14 results, with a revenue de-growth of 3.3% y-o-y and EBITDA de-growth of 37.8% y-o-y. Volumes de-grew by 3% y-o-y to 4mt. Realisations de-grew 5.5% y-o-y and 1.7% q-o-q to Rs. 4,116/t on weak pricing scenario in its key markets. Total costs/t grew 3% y-o-y to Rs. 3,708/t. EBITDA/t came in at 8/t v/s. Rs.768/t in 2QFY13. The company reported a loss of Rs. 225mn vs. PAT of Rs. 491mn in 2QFY13. Key takeaways from the result and our interaction with the management: Volumes & realisations: 2QFY14 volumes de-grew by 3% y-o-y to 4mt. Overall 1HFY14 volume growth is ~4% y- o-y. We maintain our volume growth of 5% for FY14E, implying 2HFY14 volume growth of ~6%. Volume mix is Tamil Nadu 36%, Kerala 14%, Karnataka & AP 26%, Maharashtra 17%, East 7%. Overall 1HFY14 realisations are down 6% y-o-y. We estimate FY14 realisations to de-grow 1% y-o-y, implying 2HFY14 realisation to grow 7.5% from 1HFY14 levels or Rs. 300/t, which we believe factors in the price hikes in its key markets since mid Sep-13. Costs inflation on freight and other expenses: Total costs/t in 2QFY14 grew by 3% y-o-y. This was led by higher freight costs, up 10% y-o-y and other expenses, up 14% y-o-y. Higher other expenses was due to repairs and maintenance and inflation in packaging costs. Power & fuel costs/t was down 4% y-o-y on higher usage of petcoke and drop in imported coal costs. Phase I (25MW) CPP at AP which was commissioned during July-13 witnessed teething problems during the quarter. The plant will be re-comissioned in Dec-13 along with Phase II (25MW). IPL business: ICEM s IPL revenues and EBITDA during the quarter was Rs. 569mn and Rs. 184mn respectively Capex plans: ICEM incurred a total capex of Rs.1bn in 1HFY14. It plans to incur ~Rs. 2.5bn over the next 18 months. Debt levels: Gross debt at ~Rs. 3bn increased by Rs. 2.2bn from Mar-13 due to higher receivable days and increase in short term loans & advances (increased by 1.6bn from Mar-13 levels to Rs. 6.6bn). We cut our FY14E EBITDA estimate by 9% due to weak realisations in 2QFY14. However, we retain our FY15E EBITDA estimates due to pick up in cement prices in its key markets. Despite this the stock is trading at 5.5x FY15E EBITDA. In the last five years average one year forward EV/EBITDA is 5.5x. The stock has traded below 5.5x for more than 60% of the trading days. Hence at, risk reward is unfavorable and maintain our SELL rating with a target price of /share based on 5.5x FY15E EBITDA for cement business (Rs. 29/share), Rs. 1/share for Trinetra Cement and Rs. 10/share for its IPL franchise. We remain skeptical on ICEM s balance sheet quality given mis-allocation of capital and higher loans & advances to related parties and subsidiaries. Financial summary Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) EV/EBITDA (x) EV/t (Rs.mn) FY13 45,970 8,233 1,635 5.3 5.2 3,027 FY14E 47,477 6,839 377 1.2 6.5 3,115 FY15E 52,029 8,011 1,303 4.2 5.5 3,093 Date v 7, 2013 Market Data SENSEX 20823 Nifty 6187 Bloomberg Shares o/s Market Cap ICEM IN 307mn Rs. 15.9bn 52-wk High-Low 104-42 3m Avg. Daily Vol Index member 2QFY14 result update Rs. 150mn BSE100 Latest shareholding (%) Promoters 28.2 Institutions 48.4 Public 23.4 Stock performance (%) 1m 3m 12m ICEM 2 17-47 Sensex 5 12 11 Vijayaraghavan Swaminathan raghavan@sparkcapital.in +91 44 4344 0022 Girish Choudhary girish@sparkcapital.in +91 44 4344 0021 Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset 1
Quarterly Financial Results Standalone financial results Rs. mn \ Period 30-Sep-13 30-Sep-12 yoy Growth 30-Jun-13 qoq growth FY13 FY14E yoy growth Revenues 10,859 11,227-3.3% 12,384-12.3% 45,970 47,477 3.3% Material cost 1,391 1,402-0.8% 1,444-3.7% 5,459 6,068 11.2% Employee cost 794 806-1.6% 840-5.5% 3,339 3,673 10.0% Freight costs 2,394 2,235 7.1% 2,650-9.7% 8,819 9,910 1% Power & Fuel costs 3,051 3,285-7.1% 3,301-7.6% 12,551 12,433-0.9% Other expenditure 1,955 1,449 34.9% 2,238-12.7% 7,568 8,553 13.0% EBITDA 1,276 2,051-37.8% 1,910-33.2% 8,233 6,839-16.9% Margins 11.7% 18.3% 15.4% 17.9% 14.4% Other income 80 32 150.0% 25 215.5% 185 268 44.5% Interest 988 667 48.1% 999-1.1% 3,077 3,760 22.2% Depreciation 682 699 -% 680 0.4% 2,818 2,775-1.5% PBT (314) 717-143.9% 257-222.2% 2,523 572-77.3% Tax (89) 226-139.5% 89-200.0% 888 194-78.1% Effective tax rate 28.3% 31.5% 34.6% 35.2% 34.0% Reported PAT (225) 491-145.9% 168-233.9% 1,635 377-76.9% Margins -2.1% 4.4% 1.4% 3.6% 0.8% Extra-ordinary items 0 0 0 0 0 Adjusted PAT (225) 491-145.9% 168-233.9% 1,635 377-76.9% EPS (Rs.) -0.7 1.6-145.9% 0.5-233.9% 5.3 1.2-76.9% 2
Business Overview Key estimate revision Volume de-growth of 3% y-o-y FY14E FY15E Old New Change Old New Change Revenue 48,072 47,477-1.2% 51,997 52,029 0.1% EBITDA 7,500 6,839-8.8% 8,030 8,011-0.2% Margin (%) 15.6% 14.4% 15.4% 15.4% PAT 926 377-59.2% 1,372 1,303-5.0% PAT Margin 1.9% 0.8% 2.6% 2.5% EPS 3.0 1.2-59.2% 4.5 4.2-5.0% Volumes (mt) 2.9 2.8 2.7 2.6 2.5 2.3 2.2 2.1 2.6 2% 2.5 3% 4% 11% 2.8 7% 2.7 11% 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Volumes (mt) % Y-o-Y growth 12% 10% 8% 6% 4% 2% 0% -2% -3% -4% All figures in Rs. mn, except EPS, which is in Rs. Realisations down on a y-o-y and q-o-q basis Cement EBITDA/t adjusted for IPL, Windmill and Shipping biz., Realisations (Rs./t) 5,000 4,500 4,000 3,500 3,000 2,500 20% 12% 10% 7% 3% 4,252 4,462 4,355 4,373 3% 4,188 4,186 4,116-1% -6% -5% -10% 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 0% 1,250 1,000 750 500 250 0 822 1,032 768 792 569 572 408 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Realisations (Rs./t) % Y-o-Y growth EBITDA/t 3
Business Overview (Contd.) Cost trends Higher freight and other expenses Annual volume trends Breakdown of cost/t 2Q FY14 1Q FY14 4Q FY13 3Q FY13 2Q FY13 1Q FY13 4Q FY12 3Q FY12 Raw material 570 545 551 535 558 572 570 523 12 10 8 9.2 9.1 10.5 9.9 15% 9.5 9.9 10.4 11.0 30% 20% Employee 325 317 331 342 321 330 354 333 Freight * 981 1,000 990 983 890 936 816 783 Power & fuel 1,250 1,246 1,229 1,232 1,308 1,209 1222 1221 Other costs 581 507 550 489 511 383 467 520 6 4 2 0 10% 5% 5% 5% -1% -5% -5% FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E 10% 0% -10% Total costs 3,708 3,614 3,651 3,581 3,587 3,431 3,430 3,382 **both inward and outward One year fwd. EV/EBITDA trend Key assumptions Volumes (mt) % growth 10.0 FY12 FY13 FY14E FY15E 9.0 8.0 7.0 Volumes (mt) 9.5 10.1 10.4 11.0 Realisations (Rs/t) 4217 4354 4311 4505 6.0 5.0 4.0 Raw material (Rs/t) 616 620 660 689 Power cost (Rs/t) 365 455 437 404 3.0 v-08 Feb-09 May-09 Aug-09 v-09 Feb-10 May-10 Aug-10 v-10 Feb-11 May-11 Aug-11 v-11 Feb-12 May-12 Aug-12 v-12 Feb-13 May-13 Aug-13 Fuel cost (Rs/t) 784 793 754 776 Freight outward (Rs/t) 728 877 950 997 1 yr fwd EV/EBITDA Average EBITDA (Rs/t) 890 784 564 645 4
Financial Summary Abridged Financial Statements Key metrics Rs. mn FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E Profit & Loss Operational metrics Revenues 42,034 45,970 47,477 52,029 Sales volumes (mt) 9.5 10.1 10.4 11.0 EBITDA 9,034 8,233 6,839 8,011 Blended realisations/t 4,217 4,354 4,311 4,505 Other Income 193 185 268 349 EBITDA/t 890 784 564 645 Depreciation 2,513 2,818 2,775 2,969 Grow th ratios EBIT 6,714 5,600 4,332 5,391 Revenues 20.0% 9.4% 3.3% 9.6% Interest 2,904 3,077 3,760 3,417 EBITDA 106.9% -8.9% -16.9% 17.1% PBT 3,810 2,523 572 1,974 PBT 334.7% -33.8% -77.3% 245.3% Exceptionals loss/(income) - - - - PAT 329.6% -44.2% -76.9% 245.3% Tax 880 888 194 671 Margins Ratios PAT after exceptionals 2,930 1,635 377 1,303 EBITDA 21.5% 17.9% 14.4% 15.4% Balance Sheet PBT 9.1% 5.5% 1.2% 3.8% Netw orth 40,676 40,896 40,172 40,373 PAT 7.0% 3.6% 0.8% 2.5% Total Debt 27,010 30,229 32,740 32,740 Performance Ratios Deferred Tax 3,245 3,297 3,297 3,297 Net Debt to Equity (x) 0.8 0.8 0.9 0.8 Total Netw orth & Liabilities 70,931 74,422 76,209 76,410 RoE (%) 7.2% 4.0% 0.9% 3.2% Gross Block 65,019 68,420 69,920 72,920 RoIC (%) 9.1% 5.8% 4.4% 5.5% Net Block + CWIP 45,938 47,684 45,846 45,314 Gross Asset Turnover (x) 0.7 0.7 0.7 0.7 Investments 8,520 9,578 9,578 9,578 Valuation metrics Net w orking capital (ex cash) 16,445 17,113 19,478 19,895 Shares Outstanding (mn) 307 Cash 29 47 1,307 1,622 Market Cap (Rs. mn) 15,977 15,977 15,977 15,977 Net w orking capital 16,474 17,160 20,785 21,517 Core Enterprise Value (Rs. mn) 39,783 42,984 44,236 43,921 Total Assets 70,931 74,422 76,209 76,410 EV/EBITDA (x) 4.4 5.2 6.5 5.5 Cash Flows EV/t of capacity (Rs/t) 2,802 3,027 3,115 3,093 Cash flow s from operating 8,259 6,665 4,280 6,923 P/EPS(x) 5.5 9.8 42.3 12.3 Cash flow s from investing (5,459) (5,716) (1,232) (2,651) Book value/share 117 119 119 121 Cash flow s from financing (3,102) (930) (1,789) (3,956) FCF/EV % -4.0% -4.1% -2.2% 1.2% Free cash flow s after interest (1,608) (1,771) (980) 505 Dividend yield (%) 2.9% 2.9% 2.9% 2.9% 5
Financial Summary Trinetra Cements 61.2% subsidiary TRINETRA CEMENT - India Cement's holdng is at ~ 61% Rs. mn FY12 FY13 FY14E FY15E Profit & Loss Revenues 3,523 4,432 4,805 5,567 EBITDA 243 827 540 729 EBIT (14) 477 190 379 Interest 404 534 469 476 PBT (418) (57) (195) (67) PAT (418) (57) (195) (67) Balance Sheet Netw orth 7,133 6,527 6,332 6,264 Total Debt 3,170 3,298 3,398 3,398 Total Netw orth & Liabilities 10,303 9,824 9,729 9,662 Gross Block 6,760 6,760 6,760 6,760 Net Block + CWIP 6,597 6,344 5,978 5,612 Pre-Operative Expenses - - - - Net w orking capital (ex cash) 3,703 3,477 3,739 3,616 Cash 3 3 12 434 Net w orking capital 3,705 3,480 3,751 4,050 Total Assets 10,303 9,824 9,729 9,662 Cash Flows Cash flow s from operating 589 1,069 378 898 Cash flow s from investing (1,094) (113) - - Cash flow s from financing 451 (955) (369) (476) Free Cash Flow s after interest (505) 422 (90) 422 Operational metrics Sales volumes (mt) 1.0 1.1 1.2 1.4 Realisations/t 3,492 3,925 4,004 4,124 EBITDA/t 241 732 450 540 EBITDA margin 7% 19% 11% 13% Trend in realisation and volumes Volumes (lmt) 4,400 4,200 4,000 3,800 3,600 3,400 3,200 3,000 3,573 2.7 3.0 3,708 Trend in EBITDA/t 1,000 900 800 700 600 500 400 300 200 100 0 3,883 2.8 4,186 3,807 2.7 3,871 3.4 3.3 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 257 Realisation (Rs./t) 343 771 616 615 3,524 Volumes (lkst) 877 430 2.5 3,616 395 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 EBITDA/t 4 4 3 3 2 2 1 1 0 6
Absolute Interpretation Buy Add Reduce Stock expected to provide positive returns of >15% over a 1-year horizon Stock expected to provide positive returns of >5% <15% over a 1-year horizon Stock expected to provide returns of <5% -10% over a 1-year horizon Stock expected to fall >10% over a 1-year horizon Recommendation History Date price 23-Aug-13 50 40 12-Aug-13 44 51 Buy 05-Jun-13 65 90 Buy 21-May-13 87 90 Add 28-Feb-13 83 96 Add Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through the independent analysis of Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss or revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of interest statement Analyst ownership of the stock Group/directors ownership of the stock Broking relationship with the company covered Investment banking relationship with the company covered Yes/ 7
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