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Optimistic on demand, but wary of near-term cost inflation

Upgrade to Buy on strong volume growth opportunities

* TRCL’s 2QFY22 result reflects volume recovery in South India, post the slowdown seen during COVID-19 lockdowns. Volume improved by 27% QoQ and 23% YoY, which helped it to operate its clinker plants at 74% capacity.

* The company remains a play on the volume recovery theme and one of the better picks in the Cement space, led by its capacity expansion plans (clinker capacity increase of 38%) and Balance Sheet deleveraging (net debt/EBITDA expected to peak out at 2.1x in FY22E and should improve to 1x in FY24E).

* Recent price increase in its key markets should help to mitigate fuel cost increases. We raise our FY22E/FY23E/FY24E EPS estimate by 18%/16%/12% considering higher prices in South India and a lower tax rate (25.17% v/s 31% earlier). We upgrade our rating to Buy with a revised TP of INR1,106 (17% upside).

Beats estimates on higher volumes (17% above our estimate)

* Standalone revenue /EBITDA/adjusted PAT stood at INR14.9b/INR3.9b/INR2.2b was 16%/18%/35% above our estimate (+19%/- 11%/-9% YoY) led by a 17% volume beat at 2.71mt (+23% YoY).

* Blended realization stood at INR5,510/t (-3% YoY and -4% QoQ) v/s our estimate of INR5,552/t. Cement realization declined by 3% YoY to INR5,386/t (-5% QoQ) v/s our estimate of INR5,422/t. Blended EBITDA/t stood in line with our estimates, down 27% YoY to INR1,453/t (-15% QoQ).

* Cost/t grew 10% YoY (flat QoQ) to INR4,056/t (est. INR4,109/t) on account of power and freight cost inflation, which was partially offset by better fixed cost absorption.

* Standalone revenue/EBITDA/adjusted PAT rose +18%/+8%/+11% YoY to INR27.2b/INR7.6b/INR3.8b in 1HFY22, led by 17% YoY volume growth, while margin declined by 2.7pp YoY to 27.8%.

* OCF/capex stood at INR4.3b/INR9b in 1HFY22 v/s INR7.9b/INR6.9b, while FCF was negative at INR4.7b (v/s INR1.1b in 1QFY21).

* The company has opted to move to the new tax regime, which led to tax write-offs of INR3.1b.

Highlights from the management commentary

* The management believes that sales volumes were impacted by a prolonged monsoon in 2Q and expects strong growth in 2HFY22. It is confident of achieving better than industry growth, led by deeper penetration in East India and market share gains across its operating geographies.

* Fuel cost is expected to increase by 15% QoQ in 3QFY22E. However, the management is confident of maintaining profits as Cement prices are expected to increase going forward. The industry has raised prices in Oct’21, but the management did not quantify the same.

* The clinker unit (2.25mt) in Kurnool is expected to be commissioned by 3QFY22 and the 1mt grinding unit (along with 12MW/18MW WHRS/thermal Power plant) will be commissioned by 1QFY23E.

* Modernization of the RR Nagar plant is expected to be completed by Dec’22, which will lead to a 0.35mtpa increase in clinker capacity.

* Debt has peaked out, considering the company’s current expansion plans, and there will be a deleveraging of its Balance Sheet in FY23E.

Valuation and view

* TRCL is expected to gain market share in its operating regions (South/East India), led by capacity expansions. Clinker capacity rose by 15% (to 11.4mtpa) in Jun’21 and will further increase by 23% (to 13.65mtpa by Dec’21). We expect 10.7% sales volume CAGR over FY21-24E.

* The stock trades at 14.1x/11.9x EV/EBITDA and an EV/t of USD168/USD158 in FY23E/FY24E. It has traded at an average EV/EBITDA of 14x for the past seven years. We expect it to trade at higher multiples, considering the opportunities in volume growth and leverage. We value it at 15x Sep’23E EV/EBITDA to arrive at our TP of INR1,106. We upgrade our rating to Buy from Neutral.

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