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Published on 30/11/2019 11:13:40 AM | Source: Reliance Securities Ltd

Option Strategy India Cements Ltd By Reliance Securities

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Soft Performance; Maintain HOLD

Broadly in-line with our estimates, India Cements (ICEM) has reported a weak performance in 2QFY20, with EBITDA declining by 5% YoY and 39% QoQ to Rs1.47bn vs. ours and street estimate of Rs1.44bn and Rs1.62bn, respectively. EBITDA/tonne stood at Rs505 vs. Rs457 in 2QFY19 and Rs752 in 1QFY20. Whilst sales volume declined by ~13% YoY and ~12% QoQ to 2.67mnT mainly impacted by tepid demand in AP/Telangana, average realisation stood at firm ~Rs4,506/tonne (+3% YoY and -4% QoQ). Cement opex/tonne hardened by 2.6% YoY and 1.7% QoQ mainly led by increase in other expenditures. Net profit stood at Rs87mn vs. our estimate of Rs98mn. As per the Management, continued demand pressure in AP and Telangana along with the strategy not to push volume at discounted price impacted the Company in terms of lower volume, which it expects to regain in the ensuing months with the likely pick-up in demand momentum. Further, ICEM does not have any concrete plan as of now for organic expansion in MP due to balance sheet constraints. Further, while the Company has been able to reduce its term loan by Rs1.5bn to Rs25.6bn, higher working capital loan (increased by Rs3bn) still keeps gross loan at higher level compared to that of FY19. As we continue to believe that strong cash generation and debt reduction will be the key catalysts for the stock until which the stock might not get re-rated, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs90 (from Rs94 earlier).

 

Tepid Sales Volume on Weak Demand

Election code of conduct and post-election projects cancellation or re-examination (in AP) affected payment cycle and construction activities, which along with the ICEM’s very strategy not to push volume at discounted price resulted in tepid quarterly sales volume (down 13% YoY and 12% QoQ to 2.67mnT), which led to 10% YoY decline in revenue to Rs12bn. The Management cited that it is likely to recover lost volume in the coming months despite the expected pick-up in construction activities in its key markets.

 

In-line & Muted Operating Performance

Double whammy of weak demand and sharp price contraction in AP/Telangana significantly impacted ICEM’s quarterly operating performance. EBITDA declined by 5% YoY and 39% QoQ to Rs1.47bn vs. our estimate of Rs1.44bn and street estimate of Rs1.62bn. EBITDA/tonne stood at Rs505 vs. Rs457 in 2QFY19 and Rs752 in 1QFY20. Going forward, low maintenance and higher utilisation along with benign fuel prices are likely to aid its operating performance. We peg IC EM’s EBITDA/tonne at Rs725 and Rs715 for FY20E and FY21E, respectively.

 

Outlook & Valuation

Inability to improve its balance sheet due to consistent increase in working capital requirement does not augur well for ICEM, which will lead to further delay in capacity expansion. We continue to believe that strong cash generation and debt reduction will be the key catalysts for the stock until which, the stock might not get re-rated. Hence, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs90 (6x of FY21 EBITDA).

 

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