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Profitability remains under pressure

Higher net profit attributed to exceptional gain on sale of investment

* India Cements (ICEM) posted an operating loss of INR696m in 3QFY23 (v/s our estimate of INR242m operating loss) owing to higher-than-estimated opex and lower-than-estimated improvement in cement realization. Net loss (adjusted for profit on sale of investment of INR3b) stood at INR1.4b (v/s our estimate of INR920m net loss) during the quarter.

* Management is focusing on reducing variable cost through refurbishment of plants (efficiency improvement) and increasing the blended cement share (targets to raise it upto 65% from 55% currently). The company is consulting with equipment suppliers for the refurbishment work and it will take eight to nine months.

* We cut our FY24/FY25E EPS by 7%/3%, respectively. ICEM’s valuation at 14.8x FY24E EV/EBITDA looks expensive. Maintain Sell with a TP of INR160.

Elevated costs and muted realization hurt margins

* ICEM’s revenue grew 10% YoY to INR12.2b in 3QFY23 (2% below estimate). Sales volumes rose 4% YoY to 2.18mt (1% below estimate), whereas blended realization improved 6% YoY (flat QoQ; 1% below estimate).

* Opex/t rose 24% YoY (down 1% QoQ) due to a 39%/17%/14% increase in variable cost/other expenses/employee cost, respectively. Employee cost included one-off expense of INR70m. Further, other expenses were higher due to higher repair costs (INR450m v/s INR260m/INR300m in 3QFY22/ 2QFY23). Higher opex led to an operating loss of INR696m v/s a profit of INR1b in 3QFY22. Operating loss/t for cement stood at INR369 v/s EBITDA/t of INR457 in 3QFY22 and operating loss/t of INR462 in 2QFY23.

* Revenue grew 18% YoY in 9MFY23, led by a 7%/11% growth in realization/ sales volume, respectively. Due to significant cost pressures, operating loss was at INR1.3b v/s a profit of INR4.0b in 9MFY22. Adjusted loss stood at INR3.5b v/s a profit of INR627m in 9MFY22. Gross debt stood at INR29.8b as of Dec’22.

Highlights from the management commentary

* Demand has slightly better than earlier and management expects further improvement, which will also support price hikes. For 9MFY23, ICEM’s volumes grew 11% v/s 13% for the industry in South region. Management expects double-digit growth in FY24 aided by pre-election demand.

* Fuel cost stood at INR2.95/kcal in 3QFY23 v/s INR1.95/kcal in 3QFY22 and INR3.3/Kcal in 2QFY23. The current fuel cost run-rate is at INR2.75/kcal.

* Revenue and EBITDA for Shipping/Windmill/RMC stood at INR150m/ INR13m/INR284m and INR86m/INR0/INR23m, respectively.

Valuation expensive; maintain Sell

* ICEM reported disappointing performance due to lower volume growth, weak pricing and sustained cost pressure. The lack of capacity additions has led to significant market share loss (800bp+ over FY10–22) for the company. * ICEM’s valuation at 14.8x FY24E EV/EBITDA appears unattractive, given the absence of growth plans and high net debt/EBITDA (at 4.4x in FY24E). We reiterate our Sell rating on the stock with a TP of INR160 (v/s INR170 earlier)

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