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Disappointing performance; higher OPEX hurts profitability

Price hikes essential to improve margin

* ICEM reported its historically lowest performance in 2QFY23, with an operating loss of INR912m (v/s our EBITDA estimate of INR44m) and a net loss of INR1.4b (est. loss of INR677m).

* The management expects fuel costs to stay elevated in 2HFY23, given the time lag in the delivery of coal and petcoke after booking contracts. Hence, only price hikes will help improve margin in the near-term.

* We have cut our FY23/FY24 EBITDA estimate by 44%/9%. We now expect ICEM to report a loss of INR1.3b in FY23 (v/s INR891m earlier). Valuations, at 16.3x/12.4x on a FY24E/FY25E EV/EBITDA basis, appear expensive. We maintain our Sell rating on the stock.

Weak volume and significant cost pressure offset better realization

* Revenue grew 5% YoY to INR12.5b in 2QFY23 (6% lower than our estimate). Sales volumes fell 4% YoY to 2.25mt (9% below our estimate), whereas blended realization grew 10% YoY and 3% QoQ (4% above our estimate).

* OPEX/t rose 33% YoY, led by a 61%/14%/5% increase in variable cost/other expense/employee cost. Higher OPEX led to an operating loss of INR912m v/s a profit of INR1.3b/INR308m in 2QFY22/1QFY23. Operating loss/t stood at INR405 v/s a profit of INR566/INR115 in 2QFY22/1QFY23. Operating loss/t for Cement stood at INR462 v/s a profit of INR502/INR98 in 2QFY22/1QFY23.

* Revenue grew 22% YoY in 1HFY23, led by a 7%/15% growth in realization/ sales volume. Due to significant cost pressures, operating loss stood at INR605m v/s a profit of INR3b in 1HFY22. Adjusted loss stood at INR2.1b v/s a profit of INR594m in 1HFY22. CFO has improved by 68% YoY to INR2.9b due to an increase in trade payables and a reduction in inventory. Its net debt stood at INR29.2b as of Sept’22 v/s INR30.6b in Mar’22.

Highlights from the management commentary

* Unabated cost increases without any improvement in Cement prices have impacted profitability. Fuel cost stood at INR3.3/kcal v/s INR1.7/kcal in 2QFY22. Average coal consumption cost stood at INR20,552/t. Fuel cost is estimated to remain high at INR3/kcal in 3QFY23.

* Cement prices have increased by INR30-40/bag in South India in Oct’22. An additional hike of INR15-20/bag was announced from 3rd Nov’22. Cement prices have not changed in Maharashtra and in North and East India.

* Revenue and EBITDA for Shipping/Windmill/RMC stood at INR144m/ INR80m/INR292m and INR39m/INR66m/INR23m, respectively.

Valuation expensive; maintain our Sell rating

* ICEM divested its entire shareholding in Springway Mining Pvt. (SMPL) for INR5b. We expect a gross/net debt of INR26b/INR25.8b in FY24E v/s INR29.4b/INR29.2b in Sep’22.

* Valuations at 16.3x FY24E EV/EBITDA appear unattractive, given the absence of growth plans and high net debt/EBITDA (3.8x in FY24E). We reiterate our Sell rating on the stock with a TP of INR180.

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