Higher realization drives profitability
Volume growth driven by east: TRCL’s volumes grew 6% YoY (flat QoQ) to 2.15mt in 2QFY18, driven by higher sales to east markets with the ramp-up of the Vizag unit. Volumes for south operations were impacted by weak demand from TN, partially offset by higher demand from AP/Telangana.
* Realization improvement led by favorable mix: Cement realization rose 4% QoQ to INR4,783/tonne (est. of INR4,507) due to a favorable market mix (tilted toward higher sales to south). Net sales grew 5% YoY (+5% QoQ) to INR10.6b (est. of INR 9.9b). Wind power revenue declined 20% YoY to INR340m for 2QFY18.
* Margins stable despite cost push: Margin remained flat QoQ at 27.3%, as cost push was mitigated by realization improvement due to a favorable market mix. Windmill EBITDA stood at INR294m (-25% YoY) due to a decline in revenues. Cement EBITDA/tonne stood at INR1,215 (-21% YoY, +2%QoQ) (est. of INR 1018), led by higher-than-estimated realizations. n
Management commentary: 1) Power and fuel cost/t increased sharply by 35% due to liquidation of low-cost inventory. 2) Freight cost increased 5% QoQ due to higher diesel price. 3) Gross debt of INR15b largely stable QoQ. 4) Interest cost declined 39% YoY due to a reduction in gross debt.
* Valuation view: With ~12% market share in the south, a strong brand/dealer network, superior pricing and industry-leading RoEs (~16% in FY18), the peak parameters are already in place. TRCL is likely to generate strong operating cash flow, which would be utilized to increase grinding capacity by ~16% over FY17-20E. We estimate 12.5%/18% EBITDA/PBT CAGR over FY17-20. The stock trades at EV of 9.6x FY20E EBITDA, and USD146/ton (FY20E). Maintain Buy; our TP of INR853 (valuing at 11.5x FY20E EBITDA) implies a 19% upside.
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