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Volumes disappoint, again

HeidelbergCement India’s (HEIM) Q2FY23 EBITDA of Rs476mn (down 59% YoY) was below our / consensus estimates owing to lower-than-expected volumes. Volumes declined 19%/10% YoY/QoQ as company attempts to pass-on (23% YoY and 3% QoQ) cost increases via realisation growth of 8% YoY but down 5% QoQ. Consequently, EBITDA/te declined 50%/44% YoY/QoQ to Rs476/te (I-Sec: Rs587/te). Central region – key market for HEIM – is likely to see 20% capacity addition (13-14mnte) over FY23-24 which may put pressure on HEIM’s near-term volumes / profitability, in our view. Factoring in lower volumes but also betterthan-expected fuel inventory management, we slightly raise our FY23E-FY24E EBITDA by 1-3% and marginally increase our target price to Rs186/sh (earlier: Rs184/sh), based on 7x FY24E EV/E. Maintain HOLD. Key downside risk: Pricing weakness. Key upside risk: Cost pressures easing quickly.

* Revenue declined 12% YoY at Rs5bn as 8% YoY rise in realisation was offset by 19% YoY dip in volumes to 1mnte, implying 64% utilisation. We believe, given HEIM’s ~80%+ trade sales share, volumes on a QoQ basis declined 10% owing to slow IHB demand. Our channel checks suggest current cement prices in central regions are similar to Sep’22-exit prices and average Q2FY23 prices.

* EBITDA/te declined 50% YoY to Rs476/te (I-Sec: Rs587/te) on higher cost inflation in fuels. Total cost/te increased 23% YoY and 3% QoQ to Rs4,585/te. Unit power and fuel cost stood flat on a QoQ basis at Rs1,895/te as HEIM increased its overall share of green power to 34% in Sep'22Q vs 27% YoY. Freight cost/te was up 19% YoY and 4% QoQ despite flat diesel prices both on YoY and QoQ basis, indicating an increase in lead distance. Other expenses/te was up 3% YoY and 2% QoQ as lower volumes resulted in lower absorption of fixed costs. Adjusted PAT was down 88% YoY to Rs70mn.

* Volumes may remain range bound over FY22-24E: No major expansion seems planned in the short term as the proposed greenfield Gujarat expansion is still awaiting environmental clearance and land acquisition is pending. We factor volumes to remain almost flat over FY22-24E in the range of 4.6-4.9mnte (~75-80% utilisation) and expect EBITDA/te to fall from Rs1,129/te in FY21 and Rs867/te in FY22 to Rs781/te in FY23 before rising to Rs1,091/te in FY24E.

* Company started receiving solar power under its long term power purchase agreement with the Jhansi plant. The contracted capacity is 15MW and the company is expected to receive 22GWh of solar power annually. HEIM turned net debt company in Q2FY23, with net debt of Rs109mn vs net cash of Rs2.24bn in Jun’22 owing to higher working capital requirements. It has moved to a concessional income tax regime from FY23 and shall apply corporate tax of 25.2% going forward.

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