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Stable performance; b/s strengthens further…

Heidelberg Cement reported revenue growth of 14.1% YoY, mainly on the back of 14.9% YoY jump in volumes to 1.25 MT during Q4FY21. Capacity utilisation was at 80% for the quarter while for the full year it was at 72% despite pandemic vs. 87% last year. EBITDA/tonne, however, fell 8.3% YoY to | 1067/t (vs. | 1164/t last year) mainly on account of a sharp jump in the power & fuel costs (up 17.1% YoY to | 1202/t). Higher dependence on grid power and increase in the petcoke & international coal prices led to increase in fuel cost. PBT of | 130.2 crore were up 29.4% YoY due to higher other income as it included receipt of | 18.6 crore towards SGST incentive from the Madhya Pradesh government. On the b/s front, the company repaid second tranche of NCD worth | 125 crore. The board has proposed a final dividend of | 8/share for FY21 to be paid subject to approval in the AGM.

Growth beyond FY23E to pose challenge...

HCIL expanded its capacity through debottlenecking in Imlai (Madhya Pradesh) and Jhansi (Uttar Pradesh). With the commissioning of these additional grinding capacities (Imlai: 0.5 MT; Jhansi: 0.4 MT), we expect the company to report volume CAGR of 13% in FY21-23E. However, in the absence of any major capex, growth beyond FY23E would present a challenge given the likely utilisation rate of over 91% in FY23E. We model 14.4% revenue CAGR in FY21-2E given the low base of FY21 due to pandemic while EBITDA CAGR is expected at 14.9% despite cost headwinds as the players are in a better position to pass on any increase in costs due to favourable demand supply matrix.

…but strong profitability, robust b/s remain key positive

HCIL had a weak balance sheet, which over time has strengthened with debt brought under control. Debt/EBITDA may now further reduce to 0.3x by FY23E from 1.2x in FY20. HCIL has a strong brand presence and higher share in retail trade (83% of total sales) of which 19% is in the premium segment. Thus, better realisations and controlled costs have helped the company rank among the best in industry on the EBITDA margins front (upwards of 20% since FY19). The RoCE is also among the best in industry, clocking in excess of 20% for three years led by reducing debt. With no major capex planned by the company, we expect debt to reduce further and return ratios to improve (27%+ RoCE, +30% RoIC), going forward.

Valuation & Outlook

Strong balance sheet, robust return ratios and higher retail presence are some key positives that have led the company to command the premium valuation (i.e. EV/t $121/t vs. average valuation of $105/t in the midcap space). While the volume is expected to rebound strongly in FY22E, growth beyond FY23E looks challenging due to absence of major expansion despite supportive b/s. Hence, we downgrade the stock from BUY to HOLD with a revised TP of | 280/share (i.e. 9.5x FY23E EV/EBITDA, implying EV/t of $138, earlier TP | 265/share).

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