Steady Performance Continues despite Challenges
HeidelbergCement India (HEIM) continued to deliver steady performance in 2QFY20 despite moderate deterioration in opex. EBITDA grew by 9% YoY to Rs1.2bn vs. our estimate of Rs1.15bn, while EBITA/tonne stood at Rs1,060 vs. Rs980 and Rs1,199 in 2QFY19 and 1QFY20, respectively. While sales volume remained muted at 1.13mnT (+1% YoY), average realisation remained upbeat at Rs4,581 (+7.5% YoY and -1.1% QoQ). Notably, opex/tonne surged to Rs3,522 (+7.3% YoY and +2.7% QoQ) owing to 8% YoY and 13% QoQ rise in other expenditures/tonne, while input cost/ tonne stood at Rs1,900 (+11.5% YoY and +2% QoQ) mainly impacted by increase in grid charge in MP and UP and higher flyash prices. As company continued to follow old taxation regime as of now, net profit came in lower-than-expected at Rs582mn (+16% YoY). Pricing scenario continued to remain upbeat in the Central region, which along with likely benefits of recent fuel price correction will continue to aid HEIM to report healthy operating performance in the ensuing quarters. However, there is still no development in terms of capacity expansion programme of the Company (barring 0.5mnT via debottlenecking), which would continue to be a major drag for the stock and unlikely to result in any major re-rating. Marginally tweaking our EBITDA estimate for FY20E/FY21E mainly to factor in higher realisation and opex, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs260.
Muted Sales Volume on Seasonal Weakness & Sand Unavailability
A muted demand environment in its key markets resulted HEIM to witness a marginal 0.8% YoY growth in sales volume to 1.13mnT. HEIM cited that extended monsoon and acute shortage of sand impacted the demand. While demand momentum continued to remain tepid in Oct’19 led by back-to-back festivals, HEIM cited that demand momentum is likely to improve meaningfully from Nov’19 onwards mainly led by improved sand availability and pick-up in stalled projects.
Steady Operating Performance aided by Superior Realisation
Despite soft volume and increase in opex, HEIM delivered steady and better-than-estimated operating performance primarily on account of better-than-expected realisation, as average realisation remained upbeat at Rs4,581 (+7.5% YoY and -1.1% QoQ). EBITDA grew by 9% YoY to Rs1.2bn vs. our estimate of Rs1.15bn, while EBITA/tonne (excluding other operating income) stood at strong Rs1,060 vs. Rs980 and Rs1,199 in 2QFY19 and 1QFY20, respectively. Going forward, we expect operating performance to improve further mainly led by likely reduction in Power & Fuel cost and lower fixed and maintenance cost.
Outlook & Valuation
HEIM’s robust performance in 1HFY20 despite muted volume is attributable to superior realisation and improved operating efficiency. Looking ahead, we expect visible de-leveraging of balancesheet (net debt at mere Rs1.2bn currently) and healthy operating efficiencies to result in the best return ratios vis-à-vis its comparable peers. Expecting HEIM to sort out the capacity constraint issues in due course, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs260 (9x of FY21 EBITDA).
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