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Intact demand but inefficiencies ruined earnings  

Result Synopsis

India Cement (ICEM) reported operationally weak numbers, where EBITDA margin contracted to 2.6% in Q1FY23 (v/s YSEC est. 3.7%; lowest among peers). ICEM reported revenue beat of +13% to Rs15.1bn was mainly driven by +11% & +2% higher?than? expected volume & NSR of 2.7MT & Rs5667/te, respectively. EBITDA missed by 19% to Rs398mn, while declined by 37% q/q and 76% y/y due to unprecedented surge in power/te (Rs2362 v/s YSEC est. Rs2139; highest among peers) in Q1FY23. However, management indicated that the power cost peaked in Q1FY23 and likely to remained flat in upcoming quarters. Owing to tax credits reported in Q1FY23, resulted in net profit of Rs800mn (+86% y/y) v/s YSEC est. of net loss of Rs462mn. Under?utilization of ICEM’s capacities (57% in FY22 v/s 80% in FY19 – pre COVID) is mainly due to its high exposure to south market with volatile demand and higher OPC (lower blending). Therefore, the older inefficient capacities accompanied by lower utilization rate resulted in weak margins for ICEM as compared to its peers. Additionally,the unprecedented surge in energy prices and lack of cost?control initiative by ICEM had eroded its margins further. Going forward, we believe in a short run ICEM’s margins will continue to be under pressure on account of – 1) Inflated energy prices 2) volatile south market demand/prices 3) Lack of cost?controlled initiative. However, considering the recent softening of fuel prices and healthy NSR tends to improve margins from Q3/Q4 FY23E onwards. We also believe due to intrinsic cement demand, ICEM’s capacity utilization to improve from 57% to 72% over FY22?24E thereby generating a free cash flow of ~Rs5bn over FY23?24E aids to deleverage its B/S. At CMP stock trades 20/12x EV/EBITDA on FY23/24E and we downgrade our recommendation to SELL (earlier REDUCE) with a TP of Rs146, valuing the stock at 10.5x EV/EBITDA on the FY24 estimates.

Result Highlights

* Reported volume growth of +2% q/q and +42% y/y to 2.7MT (incl. clinker of 0.119MT) v/s YSEC est. of 2.4MT in Q1FY23, while NSR increased by +5% q/q and +2% y/y (+3% higher than YSEC est.) translates revenue beat of +13% to YSEC est. to Rs15.1bn (+7% q/q & 45% y/y) in Q1FY23.

* Surge in power/te by +19% q/q and +44% y/y to Rs2362 increased the total cost/te by +7% q/q and +18% y/y, which declined EBITDA/te by 38% q/q and 83% y/y to Rs149 (weakest amid peers) v/s YSEC est. to Rs205/te in Q1FY23

* EBITDA declined by 37% q/q and 76% y/y to Rs398mn v/s YSEC est of Rs491mn, while owing to tax credits of Rs1481mn translates in net profit of Rs800mn (+86% y/y) v/s YSEC est. of net loss of Rs462mn in Q1FY23

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