Result Update The India Cements 12 November 218 Reuters: ICMN.BO; Bloomberg: ICEM IN Lackluster Performance The India Cements (ICEM) reported a listless operating performance in because of the sustained fall in realisation. Cement volume continued to pick up with ~14.% YoY growth at 3.8mnmt (above our estimate of 3.3mnmt). However, realisation continued to decline ~2% YoY to Rs4,58/tn. Effectively, revenues grew only ~9% YoY to ~Rs13.9bn (marginally above our estimate of ~Rs13.7bn). Operating costs were flat YoY (but up 2.2% QoQ) at Rs4,4/tn because of savings in logistics costs and other expenditure. Continued weakness in realisation owing to demand-supply imbalance in key ICEM markets led to EBITDA margin compression of 31bps YoY to 11.2% YoY. Effectively, EBITDA/tn fell sharply to Rs53/tn, down ~24% YoY (in line with our estimate of Rs51/tn). Interest expenses (adjusted for foreign exchange losses of Rs118.1mn) declined 6% YoY to Rs836mn. Adjusted PAT in stood at Rs132mn, a sharp fall 44%YoY and ~37% QoQ. Considering the weak performance (higher slippage than estimated), we have revised downward our estimates. Although was the toughest quarter with limited pass-through and cost increase in some pockets, we feel ICEM s performance is unlikely to improve (better than industry) and stage a quick reversal. Cost pressure is likely to continue and price reversal in key ICEM markets will be slow. Effectively, balance sheet weakness will lead to higher debt and increased interest costs. Factoring in the same, we have revised our estimates downwards for FY19/FY2 to Rs2.4/Rs4.2 (from Rs5.6/Rs7.3 earlier), respectively, and introduced our FY21 earnings estimate. We have assigned a higher discount while valuing ICEM with the replacement cost methodology to arrive at a fair value. We have retained Sell rating on the stock with a revised target price of Rs83 (from Rs12 earlier). Volume growth led by demand push in key markets: Volume rose ~14% YoY to 3.8mnmt on account of strong demand in Andhra Pradesh and Telangana, and also steady revival in Tamil Nadu. Capacity utilisation jumped to 77% from 67% YoY. However, realisation declined 2% YoY to Rs4,58/tn. Non-trade sales were higher at 45% of total sales. Realisation decline cushioned by limited cost inflation: Costs/tn were flat YoY at Rs4,4as a result of savings in other expenditure and logistics costs. Energy costs (adjusted to raw material costs) rose ~9% YoY on account of high pet-coke prices. Logistics costs fell 7.% YoY to Rs1,2/tn, which is commendable. Other expenditure increased ~16% YoY to Rs1.82bn. The fall in realisation was marginally offset by the compression in operating costs. However, despite this, EBITDA margin fell 31bps YoY to 11.2% and EBITDA/tn came in at Rs53 in, declining 24% from Rs663 in. Downward revision in our estimates: Considering the weak performance (higher slippage than estimated), we have revised downward our estimates. Although was the toughest quarter with limited passthrough and cost increase in some pockets, we feel ICEM s performance is unlikely to improve (better than industry) and stage a quick reversal. Cost pressure is likely to continue and price reversal in key ICEM markets will be slow. This, coupled with higher sales in non-trade segment, will result in working capital stress and lead to higher debt and increased interest costs. Factoring in the same, we have revised our estimates downwards for FY19/FY2 to Rs2.4/Rs4.2 (Rs5.6/Rs7.3 earlier), respectively, and introduced our FY21EPS estimate of Rs5.5. We expect EBITDA margin to hover ~12% (from 14% earlier) for the next two years as we expect cement prices to recover only marginally from the current lull. Outlook: We have valued ICEM stock at Rs4.bn/mt, at a deep discount of 45% to replacement costs of Rs7.5bn/mt to arrive at a fair value, and retained our Sell rating on it with a revised target price of Rs83 (from Rs12 earlier). We will revisit the deep discount assigned to ICEM in case of a sustained recovery in its performance and assign a lower discount. However, we have currently assigned a higher discount based on the current weak performance. At our target price, the stock trades at EV/EBITDA of ~8.x September 22E earnings. SELL Sector: Cement CMP: Rs91 Target Price: Rs83 Downside: 9% Milind Raginwar Research Analyst milind.raginwar@nirmalbang.com +91-22-6273 8172 Key Data Current Shares O/S (mn) 39.7 Mkt Cap (Rsbn/US$mn) 28.2/386.6 52 Wk H / L (Rs) 26/8 Daily Vol. (3M NSE Avg.) 6,399,855 Price Performance (%) 1 M 6 M 1 Yr The India Cements (5.) (33.7) (46.7) Nifty Index.1 (3.) 1.6 Source: Bloomberg Y/E March (Rsmn) YoY % QoQ % Net sales 13,871 12,683 9.4 13,67 1.9 Operating expenses 12,322.8 1,868.4 13.4 12,45.6 2.3 EBITDA 1,548 1,814 (14.7) 1,561 (.8) EBITDA margin (%) 11.2 14.3 (315bps) 11.5 (31bps) Other income 38 66-55 (31.3) Interest costs 836 886 (5.7) 733 14.1 Depreciation 617 632 (2.4) 616.2 PBT 132 362 (63.4) 267 (5.4) Non-recurring items (118) - - - - PBT (after non-recurring items) 14 362 (96.) 267 (94.6) Tax 51 77 (34.2) 138 (63.1) Reported PAT 14 237 (94.) 21 (93.2) Adjusted PAT 132 237 (44.1) 21 (37.) NPM (%) 1. 1.9 (91bps) 1.5 (59bps) Adjusted EPS (Rs).43.8 (44.3).7 (37.1) Source: Company, Nirmal Bang Research
Key conference-call takeaways ICEM s management indicated 14% volume growth of the overall cement industry, while ICEM grew in line with industry growth. Capacity utilisation in 1HFY19 stood at 77% vs. 67% in 1HFY18 and 73% in. ICEM is expecting it to improve further in 2HFY19. ICEM has entered into a share purchase agreement with Springway Mining Private Limited in a phased manner for ~Rs1.8bn. The management expects environmental clearance within a year and commercial operations from January 221. Cement capacity will increase by 2.2mt. ICEM has completed capex of Rs25mn and expects capex of ~Rs1.bn over the next two years. ICEM has total debt of Rs33bn, out of which Rs26bn is term debt. ICEM expects to repay Rs1.5bn of term debt by the end of this year. Currently, the trade/non-trade mix for ICEM is 55% and 45%, respectively. There is heavy demand from the non-trade segment because of infrastructure, irrigation and affordable housing projects. There is an impact on the working capital cycle as there is a delay in payment from the non-trade segment. 2 The India Cements
Exhibit 1: Operational details (Rs) YoY % QoQ % E Deviation % Volume (mnmt) 3.8 2.7 13.9 3.8.1 3.3 1.7 Cement realisation (net of freight) (Rs/mt) 4,58 4,583 (1.6) 4,323 4.3 4,413 2.1 Operating costs (Rs/mt) 4,4 4,9 (.1) 3,917 2.2 4,23 (.5) EBITDA (Rs/mt) 53 663 (24.1) 499.8 5.6 Source: Company, Nirmal Bang Research Exhibit 2: Detailed quarterly financials (Rsmn) YoY % QoQ % E Deviation % Net sales 13,871 12,683 9.4 13,67 1.9 13,686 1.3 Expenditure Change in stock (14.7) 71. (298.2) (21.4) (33.1) (11.) 27.9 Raw material costs 2,556.3 2,181.8 17.2 2,543.9.5 2,541.1.6 Purchased products 1 39 (97.4) 1. (5) (12.) Power & fuel expenses 4,73 2,974 37. 4,4 1.7 4,2 1.8 Freight costs 3,139 2,966 5.9 3,217 (2.4) 3,222 (2.6) Employee costs 872 1,64 (18.) 938 (7.) 999 (12.7) Other exp 1,821 1,574 15.7 1,552 17.3 1,515 2.2 Total operating expenses 12,322 1,829 13.8 12,45 2.3 12,169 1.3 EBITDA 1,548 1,814 (14.7) 1,561 (.8) 1,512 2.4 EBITDA margin (%) 11.2 14.3 (315bps) 11.5 (31bps) 11. 11bps Other income 38 66-55 (31.3) 38 (.3) Interest costs 836 886 (5.7) 733 14.1 722 15.8 Depreciation 617 632 (2.4) 616.2 622 (.8) PBT 132 362 (63.4) 267 (5.4) 26 (35.7) Non-recurring items (118) - - - - - - PBT (after non-recurring items) 132 362 (63.4) 267 (5.4) 26 (35.7) Tax - 125 (1.) 57 (1.) 58 (1.) Tax rate (%) - 35 (1bps) 21 (1bps) 28 (1bps) Reported PAT 14 237 (94.) 21 (93.2) 148 (9.4) Adjusted PAT 132 237 (44.1) 21 (37.) 148 (1.7) NPM (%) 1. 1.9 (91bps) 1.5 (59bps) 1.1 (13bps) Adjusted EPS (Rs).43.8 (44.3).7 (37.1).5 (11.1) Source: Company, Nirmal Bang Research Exhibit 3: Trend in operating costs/mt Operating costs/mt(rs) YoY % QoQ % Consumption of raw material 877 362 738 836 834 853 89 759 785 (5.9) 3.5 Power and fuel costs 864 1,7 1,113 1,76 1,11 1,124 1,131 1,32 1,324 2.2 1.7 Freight costs 1,45 1,31 1,72 1,72 1,98 1,31 1,74 1,46 1,2 (7.1) (2.5) Total costs per mt 3,844 4,461 3,978 4,14 4,9 3,814 4,24 3,917 4,4 (.1) 2.2 Source: Company, Nirmal Bang Research 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 57,791 65,357 (.6).9 Operating profit 8,113 9,172 6,788 8,93 (16.3) (11.8) Net profit 1,724 2,262 739 1,292 (57.1) (42.9) EPS (Rs) 5.59 7.34 2.4 4.2 (57.1) (42.9) Target price (Rs) 12 83 Rating Sell Sell Source: Company, Nirmal Bang Research 4 The India Cements
Exhibit 5: Double-digit volume gain continues (Rsmn) (%) 2.9 3.9 3.75 3.77 6 3.3 2.48 2.66 2.7 2.73 5 2.8 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 weakness continues (Rsmn) (%) 5, 15 4,75 1 4,5 5 4,25 (5) 4, (1) 3,75 (15) 3,5 (2) Volumes (mn mt) Growth (% YoY, RHS) Realisations (Rs/mt) Growth (% YoY, RHS) Source: Company, Nirmal Bang Research Exhibit 7: EBITDA/mt impacted by lower realisation Source: Company, Nirmal Bang Research Exhibit 8:Cost control via lower logistics and other expenses (Rsmn) 1,1 1, 9 8 7 6 5 4 3 1,5 791 837 89 964 887 668 731 663 69 52 499 53 (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) Source: Company, Nirmal Bang Research Exhibit 9: Freight cost control helps lower overall costs (Rsmn) (%) 1,15 15 1,1 1 1,5 5 1, 95 (5) 9 (1) 85 (15) Source: Company, Nirmal Bang Research Exhibit 1: Energy cost inflation offsets the benefits (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) Source: Company, Nirmal Bang Research Source: Company, Nirmal Bang Research 5 The India Cements
Apr-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Apr-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-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 Source: Company, Nirmal Bang Research Price $45 $6 $75 $9 $15 Source: Company, Nirmal Bang Research 6 The India Cements
Financials Exhibit 12: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY2E FY21E Net sales 5,792 51,755 57,791 65,357 73,222 Growth (%) 2.2 1.9 11.7 13.1 12. Operating expenses (42,157) (44,738) (51,3) (57,264) (64,313) EBITDA 8,635 7,18 6,788 8,93 8,99 Growth (%) 11.2 (18.7) (3.3) 19.2 1.1 Depreciation &amortisation (2,571) (2,559) (2,497) (2,84) (2,887) EBIT 6,25 4,563 4,395 5,384 6,132 Other income 141 15 14 96 11 Interest paid (3,65) (3,42) (3,382) (3,63) (3,796) Extraordinary/exceptional items PBT 2,61 1,161 1,13 1,782 2,337 Tax (867) (155) (273) (49) (643) Effective tax rate (%) (33) (13) (27) (28) (27) Net profit 1,734 1,6 739 1,292 1,694 Minority interest Reported net profit 1,734 1,6 739 1,292 1,694 Non-recurring items Adjusted net profit 1,734 1,6 739 1,292 1,694 Growth (%) 23. (42.) (26.5) 74.7 31.1 Source: Company, Nirmal Bang Research Exhibit 14: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY2E FY21E Cash & bank balance 68 84 441 281 685 Other current assets 27,8 3,277 34,57 38,42 42,17 Investments 6,19 5,884 6,84 6,284 6,584 Net fixed assets 7,474 68,97 69,345 7,279 68,787 Goodwill & intangible assets 533 75 75 75 75 Other non-current assets 1,388 1,339 31 35 39 Total assets 16,453 17,258 111,392 116,31 119,321 Current liabilities 21,71 18,78 2,953 22,519 23,953 Borrowings 27,15 3,12 33,67 36,851 38,883 Other non-current liabilities 6,556 6,532 5,194 4,884 4,534 Total liabilities 55,362 55,253 59,816 64,254 67,37 Share capital 3,72 3,82 3,82 3,82 3,82 Reserves & surplus 48,17 48,922 48,494 48,966 48,869 Shareholders' funds 51,91 52,5 51,576 52,47 51,951 Minority interest Total equity & liabilities 16,453 17,258 111,392 116,31 119,321 Source: Company, Nirmal Bang Research Exhibit 13: Cash flow Y/E March (Rsmn) FY17 FY18 FY19E FY2E FY21E Pre-tax profit 2,61 1,161 1,13 1,782 2,337 Depreciation 2,617 (29,395) 2,545 2,497 2,84 Chg. in working capital (256) 6,288 (5,68) (2,375) (2,485) Total tax paid (293) 1,914 (531) (441) (683) Other operating activities Operating CF 4,71 (18,592) (1,893) 694 1,418 Capital expenditure (892) (6,589) (1,212) (2,872) (3,739) Chg in investments (3) 9,664 37 (2) (2) Other investing activities Investing CF (894) 3,76 (96) (3,72) (3,939) FCF (15,517) (2,799) (2,378) (2,521) 162 Equity raised/(repaid) 62 1 (2) () () Debt raised/(repaid) 3,53 2,98 3,657 3,181 2,32 Dividend (incl. tax) (741) (371) (247) (247) Other financing activities 13,174 268 (92) (574) (1,544) Financing CF 15,547 2,815 2,735 2,361 242 Net chg in cash & bank bal. 3 16 357 (16) 44 Closing cash & bank bal 68 84 441 281 685 Source: Company, Nirmal Bang Research Exhibit 15: Key ratios Y/E March (Rsmn) FY17 FY18 FY19E FY2E FY21E Profitability and return ratios (%) EBITDAM 17. 13.6 11.7 12.4 12.2 EBITM 12.2 8.8 7.6 8.2 8.4 NPM 3.4 1.9 1.3 2. 2.3 RoE 4. 2. 1.4 2.5 3.3 RoCE 8.3 5.3 4.9 5.8 6.5 RoIC 8.1 6.7 5.1 5.9 6.5 Per share data (Rs) O/s shares 37.2 37.2 37.2 37.2 37.2 EPS 5.6 3.3 2.4 4.2 5.5 FDEPS 5.6 3.3 2.4 4.2 5.5 CEPS 14. 11.6 1.5 13.3 14.9 BV 1.7 13.3 13.7 17. 18.5 DPS 1.2 1.2.8.8.8 Valuation ratios (x) P/E 16.3 28.2 38.3 21.9 16.7 P/BV.9.9.9.9.8 EV/EBITDA 6.4 8.3 9.1 8. 7.5 EV/Sales 1.1 1.1 1.1 1..9 Other key ratios D/E (x).5.6.6.7.7 DSO (days) 37 44 47 48 49 DuPont analysis - RoE NPM (%) 3.4 1.9 1.3 2. 2.3 Asset turnover (x).5.5.5.6.6 Equity multiplier (x) 2.2 2.1 2.1 2.2 2.3 RoE (%) 4. 2. 1.4 2.5 3.3 Source: Company, Nirmal Bang Research 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 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 218 Sell 141 126 28 May 218 Sell 13 119 6 June 218 Sell 113 17 14 August 218 Sell 18 12 12 November 218 Sell 91 83 Rating track graph 25 23 21 19 17 15 13 11 9 7 Not Covered Covered 8 The India Cements
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