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In-line quarter; leverage remains high
The India Cements’ (ICEM) Q2FY20 EBITDA declined 5% YoY to Rs1.5bn – in-line with our estimates as better than expected cement realisation was offset by higher cost. Cement realisation declined 3.5% QoQ vs our estimate of ~7% QoQ, while total cost/te increased 3% YoY (I-Sec: flat YoY). Cement volumes declined 13% YoY at 2.67mnte, broadly in-line with estimates. Management remains hopeful of demand/price recovery in coming months. Consolidated FCF stood negative at Rs1.8bn post working capital blockage of Rs2.4bn and capex spend of Rs1.6bn. Factoring lower volumes, we cut our FY20E-FY21E EBITDA by 3% each and reduce target price to Rs95/share (earlier: Rs98/share) based on 7x Sep’21E EV/E (half yearly roll-over). Maintain ADD.
* Revenue declined 10% YoY to Rs12.5bn, broadly in-line with our estimates. Cement volumes declined 13% YoY at 2.67mnte (I-Sec: 2.71mnte), implying utilisation of 68% in Q2FY20. Cement demand in South India likely declined 10% / 6% YoY in Q2FY20 and H1FY20, respectively, as per the management. Management expects demand/price recovery in coming months with pick-up in government infrastructure spends, normal monsoon and better rural economy. Cement realisation increased 3.8% YoY / declined 3.5% QoQ to Rs4,616/te (I-Sec: Rs4,462/te). Cement companies have announced sharp price hike of Rs60-70/bag in Andhra Pradesh/ Telangana and Rs20/bag in other states across South in Nov’19.
* Cement EBITDA/te increased 9% YoY to Rs564/te (I-Sec: Rs551/te). Cement cost/te increased 3% YoY/ 2% QoQ owing to 12% YoY increase in other expenses. Raw material plus power & fuel cost stood flat YoY and the management expects the benefit of fall in input prices to flow in coming quarters. Petcoke usage for the quarter stood at 30%. Freight cost stood flat YoY, while lead distance stood at 325kms. PAT stood at Rs87mn (I-Sec: Rs58mn).
* Last year ICEM announced expansion plan (almost after a decade) with 1.5mnte clinker plant in Satna, Madhya Pradesh, and 2.3mnte grinding unit in Uttar Pradesh at a total capex of Rs12bn-13bn. Management opined progress on projects will be based on cashflow generation by the company and would be pre-dominantly funded via internal accruals. We expect consolidated net debt to increase by Rs2.2bn over FY19-FY22E to Rs35.4bn by FY22E.
* Consolidated FCF stood negative at Rs1.8bn post working capital blockage of Rs2.4bn and capex spend of Rs1.6bn mainly for land purchases. We factor-in ~2% volume CAGR over FY19-FY22E and expect cement EBITDA/te to increase to Rs722/te by FY22E from Rs650/te in H1FY20.
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