Continues to gain market share, but pricing outlook weak
* Volume growth healthy; Weaker pricing impacting realizations: 2QFY20 volumes surprised positively (up 10% YoY to 2.72mt in a weak demand scenario), implying market share gains. Cement realizations, however, declined 5.6% QoQ to INR4,708/t (+1.8% YoY), due to weaker pricing in the southern and eastern regions of India. Thus, cement EBITDA/t also declined 20% QoQ to INR 977/t (+15%YoY). According to our estimates, we expect realization/EBITDA margins to be further pressurized in 3QFY20 as prices in the South/East are currently 2-6% below 2QFY20 average.
* EBITDA 11% above estimates: Revenue/ EBITDA/ PAT of INR13.1/ INR2.9/ INR1.7b, up 11%/ 19%/ 47% YoY, was driven by strong volumes (+10% YoY) and lower tax rate at 21% (v/s 32% last year) due to MAT credit availed.
* Debt up sharply on low cash conversion and high capex: Net debt has risen sharply by 55% from Mar’19 to INR22.2b in Sep’19 (implying 1.9x net debt/ EBITDA) due to low cash conversion rate (CCR) of 0.4x and higher capex spend. CCR (Operating cash flow/ EBITDA) was low due to higher working capital. While operating cash flow for 1HFY20 stood at INR1.5b, free cash flow was negative at INR6.8b due to high INR8.3b capex spends in 1HFY20 for new capacities being set up.
* Key highlights from management interaction: Company has commenced commercial production of a new 1mmtpa cement grinding unit at Kolaghat (West Bengal) on 26th Sep’19, increasing the capacity to 2mmtpa. This should help gain market share in the West Bengal market. Other expansion projects in the East/South are largely on track for commissioning over the next 18 months. Management has also decided to continue under the old tax regime to avail investment-linked incentives.
* 1HFY20 performance: While 1HFY20 volumes grew 7% YoY, sales/EBITDA/PAT increased 12%/33%/50% YoY. We expect volumes for the company to grow by 7% in 2HFY20 and sales/EBITDA/PAT to grow 8%/15%/15%.
Valuation and view:
TRCL’s capacity expansion in the East (West Bengal, Odisha) should help gain market share in the region. However, we expect pricing pressure to continue in the region owing to ~30% capacity expansion in the East, thus driving a fight for market share. Moreover, pricing in its core market of the South (70% of volumes) has also been under pressure due to weak demand and lack of production discipline. We raise our FY20/FY21 EPS by 12-13% on higher volume growth outlook aided by market share gains. The stock trades at 13.4x FY21E EV/EBITDA, which is a ~14% premium to its historical average as well as a 25-30% premium to large-cap peers (UltraTech, Ambuja and ACC). On an asset valuation basis, it trades at ~USD140/t, which is at significant premium to its peers. We, therefore, rate it Neutral with INR750 target price (valuing it at 13x FY21 EV/EBITDA).
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