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Heidelberg Cements 4QCY12 results update

Contributed by Nirmal Bang

Heidelberg Cements’ (HCL) 4QCY12 performance was below our expectations, with EBITDA loss at Rs59mn against our EBITDA profit estimate of Rs200mn and net loss at Rs74mn against our net profit estimate of Rs63mn, primarily due to lower sales volume coupled with higher cost inflation. Sales volume declined 10% due to poor cement demand (because of shortage of labour for construction activity during the festive season) in prime markets of the company. We believe the beginning of commercial production from its incremental capacity would drive sales volume growth, and the commissioning of conveyer belt coupled with economies of scale would drive operational efficiency and lead to a net profit CAGR of 123% over CY12-CY14E. We have cut our earnings estimate by 10% and 6% for CY13E and CY14E, respectively, to factor in higher debt versus our estimates. Consequently, we have revised our target price on the stock to Rs61 (from Rs66), but retained our Buy rating on it.

Net sales remain flat: HCL reported flat net sales at Rs2.56bn, (below our estimate by 10%) due to lower sales volume following poor cement demand in prime markets of the company following shortage of labour for construction activity during the festive season. Cement sales volume declined 10% YoY to 0.67mt. Cement realisation increased 11.2%YoY to Rs3,810/tn, broadly in line with our estimate.

Operating performance improvement likely: The company reported EBITDA loss of Rs59mn due to cost inflation (high power costs, employee costs and freight charges) coupled with decline in sales volume. Power and fuel costs rose 33% YoY to Rs1,098/tn due to increase in grid power tariff and higher coal prices, freight costs rose 18% to Rs574/tn due to increase in diesel prices and higher railway freight rates, and employee costs rose 32% to Rs388/tn due to additional manpower for new capacity. Overall expenses were up 15%, which led the company to post EBITDA loss. We believe going ahead the company’s operating efficiency would improve, driven by completion of conveyer belt project (savings of Rs100/tn), more efficiency in new capacity (reduction in consumption of power by10 units/tn) and division of fixed overheads across higher sales volume.

Completion of expansion plan: The company’s expansion to increase clinker capacity from 1.2mt to 3.1mt with a grinding unit of 1.0mt at Damoh (Madhya Pradesh) and split grinding unit of 1.9mt at Jhansi (Uttar Pradesh) is complete. Commercial production from the Jhansi plant has started from 16 January 2013. Trial runs of Damoh plant have started and commercial production is expected in 1QCY13. The plant is expected to operate at 50% of its capacity in the first year of its operations.

Valuation: We expect strong volume growth and improved scale of operations to drive robust earnings growth, thereby leading to a re-rating of the stock. Hence, we have retained our Buy rating on HCL with a revised target price of Rs61 (from Rs66).