Better realization drives earnings; equity raise on cards
* Muted volume growth, strong realization: Volumes grew by a muted ~1.5% YoY to 5.72mt. Realization was up ~9% YoY (-1% QoQ) to INR4,654/t (our estimate: INR4,533/t). While cement revenue grew 11% YoY to INR26b (inline), power revenue was down 22% YoY to INR1.4b (26% miss). As a result, total revenue of INR28b (+8% YoY) came in line with our estimate.
* Cost savings also supported EBITDA growth: Total cost/t of INR3,201/t (-2% YoY/QoQ) was below our estimate of INR3,277/t due to lower freight cost (down 8% QoQ to INR1,013/t). Cement EBITDA/t thus came in 16% above our estimate at INR1,453/t (+46% YoY) – and the highest in the last 10 years. Power EBITDA, however, was weaker than expected at INR130m (- 68% YoY, -54% QoQ) due to lower realized tariff. Total EBITDA thus grew 40% YoY to INR8.4b (our estimate: INR7.5b), with the margin at 30% (+7pp YoY). Tax rate stood at 23% for the quarter. Adj. PAT was up 36% YoY to INR3.1b (our estimate: INR2.5b). The SRCM board has also approved an equity raise of up to INR30b (5% dilution at CMP).
* 1HFY20 performance: Performance was strong with revenue/EBITDA/PAT up 3%/40%/33% YoY to INR58b/INR17.5b/INR6.7b. We expect revenue/EBITDA/PAT to increase 11%/31%/40% YoY in 2HFY20.
* Valuation and View: We believe that the stock – currently trading at 14x FY21E EV/EBITDA – has factored in the strong cement price hikes this year. Moreover, we await clarity on SRCM’s bidding strategy and the IRR threshold for its new inorganic growth strategy. We raise our EBITDA/PAT estimates by 2% (due to higher realization) for FY20 but maintain those for FY21. Our target price remains unchanged. We value standalone operations at 15x FY21E EV/EBITDA and UCC operations at USD70/t to arrive at a target price of INR21,000 (implied EV/t of USD190). Maintain Neutral.
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