NOVEMBER 22, 2016 Economy News People have exchanged and deposited over Rs 5.44 trillion worth of scrapped Rs 500/1,000 notes at different banks till November 18 following demonetisation of the higher denomination currency. (ET) The government has assessed the impact of demonetisation is likely to bring the gross domestic product (GDP) growth to 5.5 per cent in the third quarter of financial year 2016-17, a steep drop from 7.1 per cent in the first quarter. (BS) The Reserve Bank of India (RBI) on Monday said small borrowers, who have been facing the brunt of demonetisation, would get an additional 60 days to repay their credit, including agriculture and housing loans. (BS) In yet another relaxation since its decision to demonetise high value currency notes, the Government has now allowed farmers to purchase seeds with the old series Rs.500 from outlets belonging to the Centre or States or from public sector firms. (BL) To finance its various projects, National Highways Authority of India (NHAI) plans to raise Rs 550.0bn in the current fiscal. It will raise Rs 200.0bn through EPFO, Rs 85.0bn through LIC, Rs 50.0 bn each through Masala and 54-EC bonds and Rs 165.0 bn from the market. (ET) Corporate News Muthoot Capital Services, a subsidiary of Muthoot Fincorp Ltd on Monday informed bourses that Crisil has downgraded its rating on the debt instruments and bank facilities to 'Crisil A-/FA-/Stable' from 'Crisil A/ FA/Stable'. (ET) Indian Hotels has decided to convene an Extraordinary General Meeting (EGM) to consider removal of CP Mistry as director. The EGM will be held on December 20. (ET) Arvind Ltd on Monday said that it has raised Rs 740 crore from the market by diluting stake in subsidiary -- Arvind Fashions Ltd. The company has completed the transaction and raised the amount from Multiples, a private equity firm. (ET) Reliance Infrastructure Limited's EPC Division has won a prestigious EPC order for Rs 36.75 bn (Rs.23.02 bn plus $205 million) from NLC India (formerly known as Neyveli Lignite Corporation Limited) for setting up two nos. of Lignite based CFBC Thermal Power Projects of capacity 250 MW each. (ET) Nepal has abruptly cancelled all agreements with Indian construction firm ILFS to build a USD one billion expressway project, connecting the Nepalese capital with the southern Terai region near the Indian border. (ET) ONGC and Oil India as also Reliance Industries and BP plc on Monday skipped the auction of 46 discovered small oil and gas fields, with only 34 areas attracting bids. The state-owned firms had initially indicated that they will bid for the fields. (Mint) JSW Steel plans to restart coking coal mining in the US following sharp rise in prices during the last few months. Spot coking coal prices have more than trebled from $90 a tonne to $310 a tonne since July, on the back of strong demand from China and predictions of worst-ever cyclone in Australia. (BL) Indian refiners owe $2.55 billion in oil dues to Iran, 90% of which are payable by private sector Essar Oil Ltd, Oil Minister Dharmendra Pradhan said on Monday. (BS) Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange Equity % Chg 21 Nov 16 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 25,765 (1.5) (8.2) (7.9) NIFTY Index 7,929 (1.8) (8.8) (8.1) BANKEX Index 21,099 (2.9) (6.6) (4.9) SPBSITIP Index 9,224 (0.4) (10.9) (11.5) BSETCG INDEX 13,587 (2.0) (10.0) (10.1) BSEOIL INDEX 11,590 (1.4) (5.3) 7.3 CNXMcap Index 13,957 (2.8) (13.2) (7.5) SPBSSIP Index 11,494 (3.2) (14.4) (7.6) World Indices Dow Jones 18,957 0.5 4.5 2.3 Nasdaq 5,369 0.9 2.1 2.4 FTSE 6,778 0.0 (3.5) (0.7) NIKKEI 18,106 0.8 5.4 9.1 HANGSENG 22,358 0.1 (3.1) (1.5) Value traded (Rs cr) 21 Nov 16 % Chg - Day Cash BSE 2,413 4.8 Cash NSE 19,467 10.4 Derivatives 569,746 64.6 Net inflows (Rs cr) 18 Nov 16 % Chg MTD YTD FII (873) (8) (9,847) 35,168 Mutual Fund 593 (25) 7,105 29,161 FII open interest (Rs cr) 18 Nov 16 % Chg FII Index Futures 16,404 19.6 FII Index Options 81,062 (2.2) FII Stock Futures 54,277 0.8 FII Stock Options 7,973 (2.6) Advances / Declines (BSE) 21 Nov 16 A B T Total % total Advances 33 113 26 172 11 Declines 266 1,078 36 1,380 88 Unchanged 1 9 7 17 1 Commodity % Chg 21 Nov 16 1 Day 1 Mth 3 Mths Crude (US$/BBL) 48.7 1.0 (4.2) 3.6 Gold (US$/OZ) 1,212.3 0.5 (3.9) (9.1) Silver (US$/OZ) 16.6 0.3 (4.1) (11.3) Debt / forex market 21 Nov 16 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % 6.3 6.4 6.8 7.1 Re/US$ 68.2 68.1 66.9 67.2 Sensex 29700 27950 26200 24450 22700 Nov-15 Feb-16 May-16 Aug-16 Nov-16
RESULT UPDATE Teena Virmani teena.virmani@kotak.com +91 22 6218 6432 THE INDIA CEMENTS LTD PRICE: RS.106 RECOMMENDATION: BUY TARGET PRICE: RS.140 FY18E EV/EBITDA: 4.6X Results of the company were ahead of our estimates led by healthy improvement in volumes and cost control measures. Lower power and fuel and other expenses helped in mitigating the impact of lower realizations on YoY basis. Net profits registered an improvement of 62% YoY driven by volume gains as well as low base of last year (on account of higher tax provision in Q2FY16). Cement prices in South India declined on yearly basis during the quarter and this was reflected in India Cement's average cement realization for the quarter. Summary table (Rs mn) FY16 FY17E FY18E Sales 42,269 43,000 45,797 Growth (%) -4.4 1.7 6.5 EBITDA 7,697 8,175 8,850 EBITDA margin (%) 18.2 19.0 19.3 PBT 2,003 2,590 3,449 Net profit 1,378 1,736 2,311 EPS (Rs) 4.5 5.7 7.6 Growth (%) 368.1 25.9 33.7 CEPS (Rs) 11.6 12.9 15.0 BV (Rs/share) 121.5 127.1 134.6 Dividend / share (Rs) 0.0 0.0 0.0 ROE (%) 3.8 4.5 5.8 ROCE (%) 8.5 9.0 9.8 Net cash (debt) (28,189) (27,175)(26,242) NW Capital (Days) 140 155 158 EV/Sales (x) 1.0 1.0 0.9 EV/EBITDA (x) 5.6 5.1 4.6 P/E (x) 23.6 18.8 14.0 P/BV (x) 0.9 0.8 0.8 Source: Company, Kotak Securities - Private Client Research At current market price of Rs 106, stock is trading at 5.1x and 4.6x EV/ EBITDA on FY17 and FY18 estimates respectively. We revise our estimates downwards to factor in slightly lower volumes and continue to value the company at 6x EV/EBITDA on FY18 estimates. We arrive at a revised price target of Rs 140 (Rs 153 earlier). We believe that in the near term, demand is likely to get impacted by demonetization. However, medium to long term cement demand growth would be led by continued focus of government on infrastructure and rural economy revival. We continue to maintain BUY recommendation on the stock. Financial highlights (Rs mn) Q2FY17 Q2FY16 YoY (%) Net Sales (adj with excise) 11,465 10,768 6% Expenditure 9,221 8,472 Inc/Dec in trade 150-145 RM 1,954 1,532 As a % of net sales 17.0 14.2 Staff cost 893 823 As a % of net sales 7.8 7.6 Power and fuel 2,074 2,476 As a % of net sales 18.1 23.0 Transportation & Handling 2,508 2,202 As a % of net sales 21.9 20.4 Other expenditure 1,642 1,584 As a % of net sales 14.3 14.7 Operating Profit 2,244 2,296-2% Operating Profit Margin 19.6 21.3 Depreciation 521 557 EBIT 1,723 1,739-1% Interest 876 985 EBT (exc other income) 847 755 Other Income 69 33 Exceptional gains 0-40 EBT 916 748 Tax 293 363 Tax Rate (%) 31.9 48.5 PAT 624 385 62% Extraordinary Items 0 0 Net Profit 624 385 62% NPM (%) 5.4 3.6 Equity Capital 3,071.8 3,071.8 EPS (Rs) 2.0 1.3 Source: Company Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
Revenue growth led by volume gains Company's revenues for the quarter came ahead of our estimates. Performance was led by 10.8% YoY growth in cement dispatches primarily coming from higher sales in western, northern and eastern markets. Cement dispatches (including clinker) in Q2FY17 stood at 2.399 MT (up 10.8% YoY). During the quarter, company sold 75% of its dispatches to southern region while remaining 25% to western, northern and eastern markets. Post the government's move to demonetize high value currency, company has till now not felt the impact on its sales in last ten days. However, with paucity of liquidity in near term with the end users/builders/individual house buyers, we expect the sales volume to get impacted in near term. Company has mentioned that now their dealers and distributors, who were more dependent on cash, are shifting to swipe machines or delayed payments to push sales. As per our interaction with industry, cement demand is likely to get impacted adversely for next few months following the demonetization move of the government. Nearly 60% of cement demand comes from real estate and absence of black money can impact the real estate sales and construction. It is also likely to impact the pace of construction as most of the payments for material and labor are settled in cash. This is likely to further put pressure on the cement demand from existing under-construction buildings. However, over longer term, cement demand growth is expected to be led by continued focus of government on infra spending and rural demand revival post healthy monsoons. However, we revise our volume estimates downwards and expect revenues to grow at a CAGR of 4% between FY16-18.(CAGR of 9% estimated earlier) Operating margin performance was led by lower costs Operating margin for Q2FY17 witnessed a decline on YoY basis mainly led by lower cement realization. However, cost control measures helped in mitigating the impact of lower realizations to some extent. Overall cost per tonne declined with correction being witnessed in power and fuel cost per tonne and other expenditure per tonne. EBITDA for cement division stood at Rs 2141 mn while for freight, EBITDA was (Rs 0.8 mn) and for wind mill, EBITDA was Rs 104 mn. Thus, EBITDA per tonne for cement stands at Rs 892 as against Rs 996 in Q2FY16. Sales and cost breakup (Rs per tonne) Q2FY17 Q2FY16 Dispatches (mn tonne) 2.399 2.165 YoY (%) 10.8 Grey cem realisation/tonne 4720 4882 YoY (%) -3.3 Cost Per tonne Inc/dec in material 63-67 Raw material 815 708 Staff cost 372 380 Power and fuel 864 1144 Transportation &Handling 1045 1017 Other expenditure 685 732 Total cost per tonne 3844 3913 Cement EBITDA per tonne 892 996 Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3
Going ahead, pet coke prices are to be watched out as prices have moved up sharply since the lows in January, 2016. During the quarter, company fulfilled nearly 80% of coal requirement via pet coke with average price of around $60 per tonne. Current prevailing prices are around $82-83 per tonne. So this can result in higher pet coke prices for Q3FY17. As per industry experts, pet coke prices have started coming down as refineries have reduced the prices and further reduction is expected from end-nov. We however factor in pet coke prices to stay around $80-85 per tonne during next few quarters and any decline from current levels would be positive for the margins. However, higher cement prices in the coming quarter are expected to mitigate the impact of rise in pet coke prices. We revise our estimates to factor in H1FY17 performance and expect margins of 19%/19.3% for FY17/18 respectively. Net profit growth ahead of our estimates Net profits registered an improvement of 62% YoY driven by volume gains as well as low base of last year (on account of higher tax provision in Q2FY16). Post revising our estimates, we expect net profits to grow to Rs 1.7 bn/rs 2.3 bn (vs Rs 1.9bn/Rs 2.6 bn estimated earlier) for FY17/18 respectively. We continue to maintain BUY on The India Cements Ltd with a price target of Rs.140 Valuation and recommendation At current market price of Rs 106, stock is trading at 5.1x and 4.6x EV/EBITDA on FY17 and FY18 estimates respectively. We revise our estimates downwards to factor in slightly lower volumes and continue to value the company at 6x EV/ EBITDA on FY18 estimates. We arrive at a revised price target of Rs 140 (Rs 153 earlier). We believe that in near term, demand is likely to get impacted by demonetization. However, medium to long term cement demand growth would be led by continued focus of government on infrastructure and rural economy revival. We continue to maintain BUY recommendation on the stock. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4
Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs) 21-Nov ARYACAPM Charu Goyal S 60,000 17.5 21-Nov ARYACAPM Asha Devi Goyal S 60,000 17.5 21-Nov ARYACAPM Babulal Vadilal Shah B 150,000 17.5 21-Nov ARYAMAN Mukesh Babulal Shah S 65,000 26.2 21-Nov BRONZE Agarwal Mahi Jaikrishna B 30,000 43.3 21-Nov BRONZE Hathila Vaneshbhai Rasubhai S 45,000 43.4 21-Nov GOLDENCAP Pradeep Vaishnavdas Kapoor S 16,910 29.0 21-Nov JETKINGQ Sharad Kanayalal Shah S 35,000 41.1 21-Nov NATECO Desai Sunny Ashwinbhai (Huf) B 25,890 90.9 21-Nov NATECO Shivangi Sunny Desai. B 20,000 91.4 21-Nov NATECO Ramaben Gagabhai Rabari. B 20,000 91.3 21-Nov NATECO Sunny Ashwinbhai Desai. B 20,000 91.3 21-Nov NATECO Ushaben Ahwinbhai Desai. B 20,000 91.4 21-Nov NATECO Ashwinbhai Gagabhai Desai. B 20,000 91.4 21-Nov NATECO Manna Mukesh Thakar. S 48,600 90.8 21-Nov NATECO Mukesh Damodar Thakar. S 48,850 91.5 21-Nov NATECO Mukesh Damodar Thakar (Huf) S 48,440 91.5 21-Nov NOBPOL Satyendra Upman B 50,000 2.0 21-Nov PONDYOXIDE Vivek Bhimsaria S 29,065 181.5 21-Nov SAL Thar Commercial Finance Private LimitedB 100,000 20.0 21-Nov SUPRDOM Rameshbhai Vallabhbhai Patel B 23,400 3.6 21-Nov SUPRDOM Chetan Rasiklal Shah S 70,000 3.6 21-Nov TRIVENIGQ Ginnii Finance Private Limited B 100,000 25.8 21-Nov TRIVENIGQ Kishan Gopal Mohta S 63,712 25.6 Source: BSE Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers Bharti Infra 360 2.2 NA 1.5 Wipro 442 1.1 NA 1.7 Tech Mahindra 447 0.4 NA 2.7 Losers Bank of Baroda 161 (9.0) NA 24.3 SBI 257 (6.7) NA 26.0 Eicher Motors 20,362 (6.6) NA 0.1 Source: Bloomberg Forthcoming events Company/Market Date Event 22-Nov 23-Nov 24-Nov 28-Nov 29-Nov Allcargo, IRB Infra, Larsen & Toubro earnings expected Siemens India earnings expected Balaji Telefilm, Bata India earnings expected Oil India earnings expected Tata Power earnings expected Source: bseindia.com Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5
RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. Fundamental Research Team Dipen Shah IT, Economy dipen.shah@kotak.com +91 22 6218 5409 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6218 6424 Teena Virmani Construction, Cement teena.virmani@kotak.com +91 22 6218 6432 Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com +91 22 6218 6443 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6218 6431 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6218 6426 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6218 6438 Amit Agarwal Logistics, Paints, Transportation agarwal.amit@kotak.com +91 22 6218 6439 Meeta Shetty, CFA Pharmaceuticals meeta.shetty@kotak.com +91 22 6218 6425 Jatin Damania Metals & Mining jatin.damania@kotak.com +91 22 6218 6440 Pankaj Kumar Midcap pankajr.kumar@kotak.com +91 22 6218 6434 Nipun Gupta Information Technology nipun.gupta@kotak.com +91 22 6218 6433 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6218 5373 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6218 6427 Technical Research Team Shrikant Chouhan shrikant.chouhan@kotak.com 91 22 6218 5408 Amol Athawale amol.athawale@kotak.com +91 20 6620 3350 Derivatives Research Team Sahaj Agrawal sahaj.agrawal@kotak.com +91 79 6607 2231 Malay Gandhi malay.gandhi@kotak.com +91 22 6218 6420 Prashanth Lalu prashanth.lalu@kotak.com +91 22 6218 5497 Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6
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