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Heidelberg (HEIM) reported good set of result for 1QFY24 with EBITDA of Rs929mn, 14% ahead of our estimate of Rs817mn. Better volumes and lower than expected costs resulted in EBITDA beat. While the numbers for 1QFY24 were tad better, overall story remains unchanged as lack of capacity addition from the company is likely to limit volume growth going forward. HEIM’s volume CAGR over the past five years is flat whereas industry has grown at ~6%. We await long term capital allocation plan from the company which will provide visibility on volume growth as well as profitability for the foreseeable future. In the absence of the same, we expect the stock to underperform the sector. We have tweaked our assumptions for the company and now bake in 5.5% revenue and 17.5% EBITDA CAGR for the company over FY23-25. We maintain our Reduce rating on the stock with a revised target price of Rs173 (Rs180 earlier) based on 7x FY25 EV/EBITDA (unchanged).

1QFY24 results summary

HEIM reported revenue of Rs5.96bn, up 1 % YoY and largely in-line with our estimates. Volumes at 1.2mn mt increased by 8.2% YoY against our expectation of 5% growth. Realizations, however, came 2.5% below our estimate. Despite the fall in realizations, the company reported decent 34% QoQ growth in EBITDA (down just 2% YoY), on account of higher than expected reduction in operating costs. HEIM reported operating costs of Rs4,179/mt, down 6% YoY and 7% QoQ. The fall in cost was driven largely by lower power & fuel costs which declined by 23% YoY and 14% QoQ to Rs1,462/mt and lower packaging costs. EBITDA/mt as a result came in at Rs772/mt against our expectation of Rs700. Adjusted PAT at Rs523mn is up 50% QoQ and 1.4% YoY.

Incentives from MP plant discontinued

HEIM was entitled to incentives under the Madhya Pradesh State Industrial Promotion Policy, 2004 and 2010 for the increased cement production facility at Damoh, Madhya Pradesh w.e.f. 18 February 2013. Under the said policy, HEIM was exempted from payment of Entry Tax on input materials for a period of 7 years and also claim refund upto 75% of SGST on sales for a period of 10 years within the state of Madhya Pradesh. These incentives were discontinued in February 2023 and as a result current revenue does not include these incentives. As a result, HEIM’s realizations declined by 2.5% QoQ in 1QFY24 against our expectation of flattish realizations. Overall EBITDA/mt impact on account of discontinuation of incentives in close to Rs50/mt.

Maintain Reduce with TP of Rs173

We have assigned lowest EV/EBITDA multiple within our coverage of 7x for HEIM owing to lack of capacity addition and sub-par volume growth. We have factored in discontinuation of incentives in our numbers and with some more tweaks to volume assumptions, our FY24 and FY25 EBITDA estimate are lower by 9% and 11% respectively. We maintain our Reduce rating on the stock.

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