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Cost pressures cause a severe dent in margins

India Cements’ (ICEM) Q2FY23 EBITDA at Rs0.9bn (down 164% YoY) was way below our / consensus estimates due to hit from higher input costs. Volume declined 4.5%/16% YoY/QoQ as ICEM withdrew dispatches to East and far East markets and low yielding areas of Maharashtra during Q2FY23. Total cost/te was up 33%/13% YoY/QoQ against increase in realisation by 10%/3% YoY/QoQ. This resulted in blended EBITDA/te reporting a sharp decline of 167% YoY and 367% QoQ to an all-time low of negative Rs388/te (I-Sec: +Rs31/te). High FY24 ‘net debt to EBITDA’ ratio of >4x (standalone net debt at Rs29.4bn) and higher exposure to volatile prices in the South remain our key concerns. We value ICEM based on 9x Sep’24E EBITDA with a revised target price of Rs140/sh (earlier: Rs130) on quarterly rollover. Maintain SELL. Key upside risk: Higher demand and/or pricing.

* Revenue grew 5% YoY to Rs13bn. Volumes decreased 4.5% YoY to 2.25mnte (ISec: 2.48mnte) in Q2FY23 with 58% utilisation. Demand in South India grew 14% YoY (down from 50% YoY in Q1FY23) in Q2FY23 as the low base of Q1FY22 tapers off. ICEM withdrew its despatches to East region and far-off markets as the contribution there was very low due to increased costs. Management expects overall cement demand to be buoyant on private sector house building and construction activity.

* Cement realisation (including RMC) rose 2% QoQ to Rs5,467/te (up 10% YoY). As per the management, despite the sharp increase in the price of input materials, cement prices could not be raised due to huge supply overhang. Further, better yielding blended cement proportion came down in the overall mix with more demand for OPC for infra activities, roads and metro rail in South India. As per the management, current prices are slightly higher than Sep’22 exit; however, the company shall require more price hikes in H2FY23 to mitigate cost pressures.

* Cement EBITDA/te (including RMC) declined 182% YoY and 438% QoQ to negative Rs434/te. Total cost/te was up 13% QoQ and 33% YoY in Q2FY23. Raw material plus power and fuel cost/te increased 61% YoY and 20% QoQ as fuel consumption rate increased from Rs1.6 per kcal to Rs3.26. Fuel mix was: 84% imported coal and 11% petcoke. Fuel consumption cost is likely to taper down QoQ during Q3FY23 as ICEM maintains ~75-days inventory with spot prices currently at ~Rs3/kcal. Freight cost/te was down 3%/5% YoY/QoQ owing to lower lead distance as diesel prices were flat on both YoY and QoQ basis.

* Consolidated net debt near Rs30bn; standalone debt was Rs29.4bn as on Sep’22. High FY24 ‘net debt to EBITDA’ ratio of >4x and higher exposure to volatile prices in the South remain our key concerns. Further, out of Rs6bn sale proceeds from its investment in Springway Mining Private Limited, Rs3bn shall be utilised in the repayment of debt.

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