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Margins impacted by cost escalations

HeidelbergCement India’s (HEIM) Q2FY22 EBITDA at Rs1.2bn (down 8% YoY) was higher than our / consensus estimates led by higher volumes, up 11% YoY and 4% QoQ. Realisation remained flat QoQ and YoY while total cost/te rose 6.8% YoY and 4.1% QoQ resulting in EBITDA/te declining 16.8% YoY and 14.6% QoQ to Rs946/te. While investor concerns around sharp cost increases seem valid, industry has demonstrated strong pricing resilience in the past. Our recent channel checks suggest companies have increased prices by Rs15-20/bag across regions. Factoring in cost inflation, we reduce our FY22E-FY24E EBITDA by 3-7%. Maintain ADD with an unchanged target price of Rs280/sh based on 8x Sep’23E EV/E on quarterly rollover. Key risk: Lower demand / pricing.

* Revenues grew 11% YoY to Rs5.7bn. Volume growth was better at 11% YoY (up 4% QoQ) to 1.23mnte implying 78% utilisation. Realisation came in at Rs4,624/te, (flat YoY) owing to flat pricing in the central region. Premium products contributed 21% of the trade volumes in Q2FY22 and the share is expected to rise to 25% in the near term. Trade segment contributed 83% of sales during the quarter. On the pricing front, HEIM has already taken a price increase of Rs10-15/bag from 1st Oct’21 and another hike of Rs10/bag from 20th Oct’21 in Central India.

* EBITDA/te declined 16.8% YoY to Rs946/te on account of higher raw material and power & fuel costs. Cost/te increased 6.8% YoY and 4% QoQ to Rs3,737/te. Raw material plus power & fuel costs increased 14.3% YoY and 1.5% QoQ to Rs2,080/te led by higher fuel prices and various input cost inflations. Freight cost/te increased 5.3% YoY owing to increasing diesel costs. PAT declined 4.6% YoY at Rs596mn.

* Rising trend in major input prices: Domestic as well as international coal prices have increased with domestic supplies being restricted for the use of power plants. HEIM currently holds coal inventory for 30 days. Increase in crude prices has resulted in higher packing costs. Diesel prices also continue to move on an upward trajectory. Management indicated a Rs400/te possible increase in costs over H2FY22 owing to higher power & fuel costs.

* Management expects industry volumes to grow 10-12% YoY in FY22 and by ~10% YoY in FY23. The 2022 elections in Uttar Pradesh will likely accelerate infrastructure projects in the near term.

* Net cash to increase to Rs8bn in FY23E from the current Rs2.3bn as no major expansion is currently under execution. Company is likely to incur replacement capex of Rs400mn-500mn and capex towards building AFR capacities to the tune of Rs100mn-150mn, taking the total capex to Rs550mn-600mn in FY22E.

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