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Weak volumes remain a key concern

Margins impacted by higher costs

* India Cements (ICEM)’s 1QFY22 EBITDA was 18% below estimate, weighed by higher costs and lower volumes. Utilization stood at just 50% in 1QFY22.

* We revise down our FY22E/FY23E EPS by 7%/7%, factoring in weaker volumes and higher costs. ICEM trades at 10.3x FY23E EV/EBITDA, which is fair, in our view, given its strong presence in South. We maintain Neutral.

EBITDA misses estimates by 18% on lower volumes and higher costs

* Revenue / EBITDA / Adj. PAT was up 35%/4%/121% YoY to INR10.2b/INR1.6b/INR0.4b, but missed our estimate by 10%/18%/29%.

* Volumes grew 36% YoY to 1.95mt, but missed our estimate by 10% on weak demand in South. This was attributable to the more pronounced impact of the second COVID wave in South v/s other regions, partially offset by higher selling in East and Maharashtra.

* Blended realization came in flat at INR5,257/t (-1% YoY, in line with est). On the other hand, cost per ton was up 5% YoY to INR4,424/t (v/s our est. of INR4,331/t) due to higher fuel and freight costs as well as higher sales in the faraway markets of East and Maharashtra.

* Thus, EBITDA/t declined 24% YoY to INR833 (v/s our est. of INR923) and the margin 473bps YoY to 15.8% (v/s our est. of 17.6%).

Highlights from management commentary

* Utilization stood at 50% v/s 77% in 4QFY21. The management expects demand to pick up with the easing of the lockdowns across states, but remains cautious due to the possibility of a third wave. The sales volume off-take in July was better v/s June and is expected to improve further in August.

* Blended cost of fuel stood was INR9,700/t in 1QFY22 (v/s INR9,100/t in 4QFY21). On a per kcal basis, fuel cost stood at INR1.5 (v/s INR1.42 in 4QFY21) and is currently at INR1.6.

* Gross debt stands at INR29.7b v/s INR30.0b in Mar’21.

Valuation and view

* We expect ICEM’s market share loss in South to continue as key competitor Ramco’s new capacities get commissioned within six months.

* We expect net debt to decline further as the company continues to delay its capex plans. Net debt declined 15% YoY to INR30.0b in FY21.

* ICEM trades at 10.3x FY23E EV/EBITDA and USD72/t EV/capacity. We value the stock at 10x Sep’23 EV/EBITDA to arrive at TP of INR190. We maintain Neutral.

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