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India Cements 3QFY2012 performance highlights and results update

Contributed by Angel Broking

India Cements (ICEM) reported strong operating performance during 3QFY2012. The company’s bottom line grew by 162.3% yoy to Rs.56cr. Bottom-line growth was largely due to improved cement realization (16.2% yoy to Rs.4,262 per tonne) and higher cement dispatches (6.9% yoy to 2.18mn tonnes), as cement demand in South India showed signs of recovery. We maintain our Neutral view on the stock.

Higher yoy realization drives up OPM by 443bp yoy: For 3QFY2012, India Cements registered 20.5% yoy growth in its top line to Rs.944cr, mainly driven by 24.3% yoy growth in revenue from the cement business. Cement business growth was aided by a substantial 16.2% yoy increase in cement realization to Rs.4,262/tonne and 6.9% yoy growth in cement dispatches to 2.18mn tonnes. The company’s OPM improved by 443bp yoy to 20.9% and was boosted by higher realization despite the steep increase in operating costs. Power and fuel cost and freight cost per tonne increased by 7.4% and 5.1% yoy, respectively. Interest cost at Rs.75cr was higher by 84.4% yoy due to replacement of FCCB and impact of rupee depreciation on outstanding short-term forex liabilities (Rs.13.7cr).

Outlook and Valuation: Going ahead, we remain skeptical about the ability of the company to sustain prices at elevated levels, as we believe production discipline in the southern region will be put to test with the commissioning of new capacities. Despite reasonably good earnings visibility over the period, ICEM’s return ratios would remain subdued due to a large capex burden and substantial investments in subsidiaries. At the CMP, though the stock is trading at low valuations of EV/tonne of US$64 on current capacity (US$51 on FY2013E capacity), we believe this is justified considering the company's unfavorable locational presence. Hence, we maintain our Neutral recommendation on the stock.