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Performance missed on all front

Result Synopsis

India Cement (ICEM) continued its poor performance and reported an EBITDA loss of Rs762mn (v/s YSECe +Rs133mn) as total cost surged by 28% y/y (2% above YSECe) whereas revenue increased by 7% y/y (4% below YSECe). ICEM volume declined by 4% y/y but the sharp rise in NSR by 13% y/y translates to revenue growth of 7% y/y to Rs13.3bn. Jump in cost/te by (+34% y/y) due to unprecedented surge in power/te by 77% y/y (Rs2699; highest among peers) and RM cost/te by 37% y/y. ICEM reported a net loss of Rs1.13bn (v/s net loss of Rs907mn YSECe) for Q2FY23.

The unprecedented surge in energy prices and lack of cost-control measures had eroded the margins for ICEM. Going forward, we believe in a short run ICEM’s margins will continue to be under pressure on account of – 1) Elevated energy prices 2) Volatile south demand/low blending 3) Lack of cost-controlled initiative. Also, with the resurgence of fuel prices (Pet coke $210/te v/s $160/te in Sep’22) and limited scope for price hike in the south would keep margins under pressure. Under-utilization of ICEM’s capacities (57% in FY22 v/s 80% in FY19 – pre COVID) is mainly due to its high exposure to the south market with volatile demand and higher OPC (lower blending). However, we believe due to intrinsic cement demand, ICEM’s capacity utilization to improve from 57% to 72% over FY22-24E thereby generating a free cash flow of ~Rs5bn over FY23-24E aids to deleverage its B/S. At CMP stock trades 25/15x EV/EBITDA on FY23/24E and we maintain our recommendation to SELL with a TP of Rs146, valuing the stock at 10.5x EV/EBITDA on the FY24 estimates.

Result Highlights

* Reported a revenue of Rs13.3bn increased by 7% y/y (-12% q/q; 4% below YSECe) as NSR increased substantially by 13% y/y (+4% q/q; 8% above YSECe). While volumes declined by 4% y/y and 16% q/q to 2.3MT (12% below YSECe).

* Witnessed a strong uptick in Total cost/te by 34% y/y and 13% q/q (16% above YSECe) mainly increase in RM/power/other cost by +37/77/14% y/y and +36/14/5% q/q respectively.

* Reported EBITDA loss of Rs338/te as NSR growth of Rs655/te y/y was inadequate to mitigate the total cost increase of Rs1595/te y/y.

* Reported net loss of Rs1.13bn (v/s net loss of Rs907mn YSECe) for Q2FY23.

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