Subdued Operating Show on Cost Pressure
India Cements (ICL) has reported a subdued set of numbers for 4QFY18. Its reported EBITDA declined by ~17% YoY and ~5% QoQ to Rs1.6bn (vs. our estimate of Rs1.7bn) owing to higher-thanestimated rise (+5.5% QoQ) in cement operating cost/tonne to Rs3,920 led by higher employee cost, Freight and Power & Fuel cost. Cement EBITDA/tonne came in at Rs499 as against Rs712 and Rs628 in 4QFY17 and 3QFY18, respectively. However, net profit stood at Rs353mn (vs. our estimate of Rs200mn) led by lower tax and interest cost. Whilst receivables declined to Rs6.3bn (vs. Rs7.9bn in 1HFY18), which aided ICL to sequentially reduce its gross debt by Rs2.3bn, on YoY basis its debt rose by Rs2bn to Rs31.3bn again reaching the peak witnessed in FY15. We believe that ICL’s inability to pare down debt amid no capacity expansion may not warrant any rerating of the stock, while the likely pick-up in pricing scenario and acceleration in demand in TN are likely to aid ICL’s profitability. Though we cut our EBITDA estimate by 11% and 8% for FY19E and FY20E, respectively mainly to factor in cost inflation, the current valuations appear to be attractive following a sharp correction in stock price over last three months. We maintain our BUY recommendation on the stock with a downwardly revised Target Price of Rs180.
Moderate YoY Growth in Revenue; Sales Volume up 6.4% YoY
Revenue grew by a moderate 4% YoY to Rs14bn mainly led by 6.4% YoY growth in sales volume growth to 3.09mnT. A substantial demand improvement in AP/Telangana along with gradual demand revival in Tamil Nadu aided sales volume growth. Southern demand grew by 15% in 4QFY18, which ICL expects to sustain in 1HFY19 as well. Further, revenue from Shipping, Trishul (RMC) and Wind Mill stood at Rs43mn, Rs245mn and Rs43mn, respectively.
Cost Inflation Mars Operating Performance
Despite 1.7% QoQ rise in realisation, ICL’s EBITDA declined by 17% YoY and 5% QoQ to Rs1.6bn led by higher-than-estimated surge in operational cost. While Freight cost/tonne increased by 4% QoQ to Rs1,074, Power & Fuel cost/tonne rose by 1% QoQ to Rs1,131. Notably, employees cost too surged by 30% QoQ to Rs996mn mainly due to non-recurring items of ~Rs170mn during the quarter. Cement EBITDA/tonne stood at Rs499 vs. Rs712 and Rs628 in 4QFY17 and 3QFY18, respectively. Looking ahead, we believe that likely improvement in realisation may aid ICL’s operational performance.
Outlook & Valuation
Higher debt, absence of pricing recovery, cost pressure along with ambiguity over capacity expansion have been major headwinds for the stock performance for last couple of months. We believe that demand revival in Southern market (including Tamil Nadu) along with likely up-tick in realisation is expected to augur well for the stock, which – following a sharp correction over last three months – is available at a attractive price point (6.3x FY20 EBITDA). We maintain our BUY recommendation on the stock with a downwardly revised Target Price of Rs180.
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