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Volumes grow on lower base, but profitability under pressure

Margins impacted by higher costs

* India Cements (ICEM)’s 2QFY22 result was in line with our estimates, although earnings were under pressure due to higher costs. The lower base of last year aided volume growth of 12% YoY; this was offset by a 13% YoY increase in opex/t, leading to a 49.2% YoY drop in blended EBITDA/t.

* We maintain our FY23E/FY24E estimates and Neutral rating on the stock as valuations at 12x/9.3x FY23/FY24E EV/EBITDA appear expensive. Higher volatility in earnings due to the demand-supply mismatch in the South region and higher leverage (net debt/EBITDA at 4.5x/3.6x FY22/FY23E) in the absence of capex plans are the key concerns.

Results in line with our estimates; EBITDA declines 43% YoY

* Revenue / EBITDA / Adj. PAT stood at INR11.9b/INR1.3b/INR0.2b (+11%/- 43%/-69% YoY) v/s our est. of INR11.5b/INR1.4b/INR0.2b.

* Volumes grew 12% YoY to 2.36mt (v/s est. of 2.25mt) on the low base of last year, partially offset by lower cement prices in the East/South markets.

* Blended realization declined 1% YoY to INR5,043/t (v/s est. of INR5,100/t), whereas cost per ton was up 13% YoY to INR4,477/t (in line with our est). Cement realization was down 1.5% YoY / 4.7% QoQ.

* Thus, blended EBITDA/t declined 49% YoY to INR566 v/s our est. of INR614. The margin declined 10.7pp YoY to 11.2% (-4.6pp QoQ). Cement EBITDA/t was down 52% YoY / 35% QoQ.

* 1HFY22 revenue / EBITDA / adj. PAT stood at INR22.1b/INR3.0b/INR0.6b (+21%/-24%/-33% YoY) as the margin declined 8.0pp YoY to 13.4%, while volumes were up 22% YoY to 4.31mt.

* 1HFY22 OCF/capex/FCF stood at INR1.7b/INR0.7b/INR1.0b v/s INR3.1b/INR0.4b/INR2.7b in 1HFY21.

Highlights from management commentary

* The company has taken a price hike of INR30/bag in Oct’21 and INR25/bag in Nov’21 in its core markets of Tamil Nadu and Kerala. Cement prices have largely remained flat (since September) in other operating geographies (East and Karnataka, except INR10/bag hike in Maharashtra).

* The company has lower cost coal inventory (procured at USD120–130/t), which would last 3–3.5months. It would place orders for coal within a month, which would be procured at USD230–240/t (in case coal prices do not soften from current levels). Thus, it expects a net increase of INR200/t QoQ in cost/t (in 3QFY22) on account of higher coal costs.

Valuation and view

* The lack of capacity additions has led to significant market share loss for the company, which we estimate at 680bps over FY10–17. We expect ICEM’s market share loss to continue going forward as well due to the absence of clarity on its future expansion plans.

* ICEM has secured approvals for capacity upgrades at some of its plants, although their execution depends on market conditions and improvement in its cash flows. There is also not much clarity on ICEM’s plans to set up a grinding unit and clinker plant in Madhya Pradesh.

* With ~80% of its capacity in South, ICEM enjoys a good brand recall in the region. We note that every increase of 1% in realization leads to a 7% increase in the company’s EBITDA.

* ICEM trades at 12.0x/9.3x FY23/FY24E EV/EBITDA. We maintain a Neutral rating and value it at 10x Sep’23E EV/EBITDA to arrive at TP of INR200. Any clarity on the company’s expansion plans remains a key monitorable for changing our view on the stock.

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