INSTITUTIONAL EQUITY RESEARCH The India Cements Ltd (ICEM IN) Volumes consistency maintained, confident of regaining pricing power INDIA CEMENT Quarterly Update 12 November 218 Top takeaways from Q2FY19 Operating EBITDA beat our and consensus estimates by 11%. EBITDA/tonne at Rs 53 was 7% better than expected. Volume growth remained robust at 14% yoy. Absence of material recovery in cement prices stayed a drag on earnings. Blended realisations moved up by mere 2% qoq despite robust volumes. However, directionally, cement prices seemed to have bottomed out. We still believe that the cement industry will materially regain its pricing power in H1CY19. We also believe cost pressures will start easing off from Q4, and that the industry s cost CAGR will fall in line with its long term cost CAGR of 3 4%. Our FY19 estimates for India Cements will be missed by ~15% at the operating level due to the delay in the industry regaining pricing power. We still do not foresee any material risk to our FY2 estimates yet. We continue to believe India Cements is an attractive bet on valuations, trading at a mere US $55/tonne. We maintain BUY with a revised target of Rs 18 (vs. Rs 2 earlier) based on a marginal cut in earnings and factoring in the impact of new capex. At Rs 18, it will trade at US$ 8/tonne, still at a discount to replacement. We hosted the Q2 call. Brief takeaways: Management maintained its stance that India Cements will touch almost full utilisation in Q4. Extremely confident of recovery in pricing power from H1CY19. Backed by the confidence of having better volumes and cement prices, ICL has announced a greenfield capex worth Rs 12bn in central India, including a split grinding unit that it sees on stream in FY22. Management targets to fund the capex through internal accruals. Barring this, it has indicated a debt repayment of +Rs 8bn over the next three years. This effectively means an EBITDA guidance of over Rs 8bn p.a. from FY2, which is in line with our estimate. Capex may be delayed marginally if the market conditions are not supportive an important management comment in our view suggesting that it would remain conscious of not raising material debt or bringing about equity dilution to fund capex. Q3 will remain a weak quarter and will not reflect the entire impact of an easing of costs. Outlook and valuation As the stock trades at a deep discount to peers (at US$ 55/tonne), we see deep value. At our target (Rs 18) the stock will trade at US$ 8/tonne, which is still at a discount to replacement. Return of pricing power is a key for ICEM to improve its earnings. Maintain BUY given its cheap valuations and deep discount to peers. At a size of 16mn tonnes, the company has the potential to trade at higher multiples. BUY (Maintain) CMP RS 97 TARGET RS 18 (+86%) COMPANY DATA O/S SHARES (MN) : 31 MARKET CAP (RSBN) : 29 MARKET CAP (USDBN) :.4 52 WK HI/LO (RS) : 26 / 8 LIQUIDITY 3M (USDMN) : 9.3 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18 PROMOTERS : 28.4 28.3 28.4 FII / NRI : 16. 16. 18.5 FI / MF : 27.5 28.3 28.1 NON PRO : 5.6 5.4 4.6 PUBLIC & OTHERS : 22.5 21.9 2.5 KEY FINANCIALS Rs mn FY19E FY2E FY21E Net Sales 56,42 62,467 66,869 EBIDTA 6,789 8,661 9,144 Net Profit 497 1,85 2,115 EPS, Rs 1.6 5.9 6.9 PER, x 57. 15.7 13.4 EV/EBIDTA, x 8.3 7.1 7.1 P/BV, x.5.5.5 Debt/Equity (%) 7. 73. 78.7 CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY2E FY21E FY2E FY21E Revenue 62.5 66.9 1% EBITDA 8.7 9.1 5% Core PAT 1.8 2.1 14% EPS (Rs) 5.9 6.9 14% Vaibhav Agarwal (+ 91 22 6246 4124) vagarwal@phillipcapital.in (Rs mn) Q2FY19 Q2FY18 YoY Q1FY19 QoQ Vs. PC Comments Revenue 13,871 12,683 9% 13,67 2% 6% Volumes (mnt) 3.8 2.7 14% 3.8 % 4% Volume growth continues to surprise positively Blended Realisations (Rs/tonne) 4,58 4,696 4% 4,425 2% 1% Realisation remains marginally higher vs. exp. Expenditure (Rs/tonne) 4,4 4,24 % 3,917 2% 1% EBITDA 1,549 1,814 15% 1,561 1% 11% Better volumes led to +11% vs. expectations surprise EBITDA (Rs/tonne) 53 672 25% 58 1% 7% EBITDA Margin 11.2% 14.3% 11.5% Depreciation 617 632 2% 616 % Interest Cost 954 886 8% 733 3% Other Income 38 66 43% 55 31% PBT 15 362 96% 267 94% PAT 15 237 94% 21 93% Page 1 PHILLIPCAPITAL INDIA RESEARCH
One year forward band chart PE band PBV band 12 Rs 1 8 6 4 2 2 4x 3x 2x 1x 5 Rs 4 3 2 1 2.4x 1.8x 1.2x.6x 4 MCap/Sales band EV/EBIDTA band 16 Rs mn 2.4x 2 Rs mn 14 12 1 8 6 4 2 1.8x 1.2x.6x 16 12 8 4 15x 12x 9x 6x EV/Sales band EV/tonne 2 Rs mn 2.8x 25 Rs mn 2$ 15 2.1x 2 15$ 1 1.4x 15 1 1$ 5.7x 5 5$ Source: PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH
Financials Income Statement Y/E Mar, Rs mn FY18 FY19e FY2e FY21e Net sales 54,323 56,42 62,467 66,869 Growth, % 7 4 11 7 Total income 54,323 56,42 62,467 66,869 Raw material expenses 9,857 1,741 12,367 13,554 Employee expenses 5,113 5,164 5,423 5,694 Other Operating expenses 32,263 33,78 36,16 38,477 EBITDA (Core) 7,9 6,789 8,661 9,144 Growth, % (2.4) (4.2) 27.6 5.6 Margin, % 13.1 12. 13.9 13.7 Depreciation 2,79 2,846 2,915 2,973 EBIT 4,3 3,943 5,746 6,171 Growth, % (3.1) (8.3) 45.7 7.4 Margin, % 7.9 7. 9.2 9.2 Interest paid 3,648 3,466 3,477 3,478 Other Non Operating Income 245 245 245 245 Pre tax profit 857 681 2,473 2,897 Tax provided 192 184 668 782 Profit after tax 664 497 1,85 2,115 Others (Minorities, Associates) Net Profit 664 497 1,85 2,115 Growth, % (59.3) (25.2) 263.1 17.2 Net Profit (adjusted) 664 497 1,85 2,115 Unadj. shares (m) 38 38 38 38 Wtd avg shares (m) 38 38 38 38 Balance Sheet Y/E Mar, Rs mn FY18 FY19e FY2e FY21e Cash & bank 535 535 535 535 Debtors 6,453 6,7 7,421 7,944 Inventory 6,947 7,212 7,988 8,551 Loans & advances 18,53 18,989 19,449 19,98 Other current assets Total current assets 32,465 33,438 35,393 36,938 Investments 4,88 4,88 4,88 4,88 Gross fixed assets 117,24 119,961 121,961 123,961 Less: Depreciation 45,739 49,178 52,686 56,251 Add: Capital WIP 1,757 2, 5, 1, Net fixed assets 73,222 72,783 74,275 77,79 Total assets 19,775 11,39 113,756 118,736 Current liabilities 14,558 15,116 16,741 17,921 Total current liabilities 15,988 15,116 16,741 17,921 Non current liabilities 4,697 42,885 44,537 47,858 Total liabilities 56,685 58, 61,278 65,779 Paid up capital 3,82 3,82 3,82 3,82 Reserves & surplus 49,69 48,827 48,997 49,476 Shareholders equity 53,91 52,38 52,478 52,957 Total equity & liabilities 19,775 11,39 113,756 118,736 Cash Flow Y/E Mar, Rs mn FY18 FY19e FY2e FY21e Pre tax profit 857 681 2,473 2,897 Depreciation 2,79 2,846 2,915 2,973 Chg in working capital 4,354 1,852 355 394 Total tax paid 192 184 668 782 Cash flow from operating activities 9 1,492 4,365 4,694 Capital expenditure 2,634 2,97 4,97 6,97 Chg in investments 79 Other investing activities 1,167 39 4 4 Cash flow from investing activities 1,428 2,972 4,971 6,971 Equity raised/(repaid) Debt raised/(repaid) 2,725 2,195 1,678 3,349 Dividend (incl. tax) 286 715 1,72 1,72 Cash flow from financing activities 2,483 1,48 65 2,277 Net chg in cash 156 Valuation Ratios FY18 FY19e FY2e FY21e Per Share data EPS (INR) 2.2 1.6 5.9 6.9 Growth, % (59.3) (25.2) 263.1 17.2 Book NAV/share (INR) 171. 168.5 169. 17.6 FDEPS (INR) 2.2 1.6 5.9 6.9 CEPS (INR) 11.2 1.8 15.3 16.5 CFPS (INR) (3.6) 4.2 13.5 14.6 DPS (INR).9 2.3 3.5 3.5 Return ratios Return on assets (%) 2.7 2.4 3.5 3.6 Return on equity (%) 1.3 1. 3.5 4. Return on capital employed (%) 3.1 2.7 4. 4.2 Turnover ratios Asset turnover (x).7.7.7.8 Sales/Total assets (x).5.5.6.6 Sales/Net FA (x).7.8.8.9 Working capital/sales (x).3.3.3.3 Working capital days 116.7 115.1 15.9 1.9 Liquidity ratios Current ratio (x) 2.2 2.2 2.1 2.1 Quick ratio (x) 1.8 1.7 1.6 1.6 Interest cover (x) 1.2 1.1 1.7 1.8 Dividend cover (x) 2.3.7 1.7 2. Total debt/equity (%) 64.8 7. 73. 78.7 Net debt/equity (%) 62.2 61.1 64.1 69.9 Valuation PER (x) 42.7 57. 15.7 13.4 Price/Book (x).5.5.5.5 EV/Net sales (x) 1.1 1. 1. 1. EV/EBITDA (x) 8.1 8.3 7.1 7.1 EV/EBIT (x) 13.3 14.3 1.6 1.5 Source: Company, PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH
Stock Price, Price Target and Rating History 25 B (TP 32) 2 B (TP 32) B (TP 29) 15 B (TP 2) B (TP 2) B (TP 26) B (TP 26) B (TP 2) 1 B (TP 125) B (TP 125) 5 N 15 D 15 F 16 M 16M 16 J 16 J 16 S 16 O 16 D 16 J 17 M 17A 17 J 17 J 17 S 17 O 17 N 17 J 18 F 18 A 18 M 18 J 18 A 18 O 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 4 PHILLIPCAPITAL INDIA RESEARCH
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