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Disappointing performance; operating loss in cement continues Cement prices increased in south region

* India Cements (ICEM) reported EBITDA of INR81m (est. INR254m) in 2QFY24. Operating loss in its cement division stood at INR12m (fifth consecutive quarter of operating loss). Net loss stood at INR814m (est. INR631m loss).

* Cement demand is robust in its key markets of the south region. However, the company’s volume growth was limited due to a working capital crunch during the quarter. Recently, cement prices were increased and stabilized in the south region. It also entered into a binding agreement for the sale of land (73.75 acres), subject to certain agreed conditions. It has received full consideration relating to this land; however, a profit of INR428m is yet to be recognized due to pending conditions.

* We cut our FY24E earnings (EBITDA cut ~25%), considering lower-thanexpected profitability in 1HFY24. We maintain our FY25 estimates. We reiterate Sell with a TP of INR150 (premised on 10.5x Sep’25E EV/EBITDA).

Volumes up 5% YoY; blended realization down 7% YoY

* ICEM’s revenue declined 3% YoY to INR12b in 2QFY24 (-3% vs. our estimate). Sales volume was up 5% YoY at 2.37mt, whereas blended realization/t fell 7% YoY. Cement realization/t also declined 7% YoY to INR4,968.

* Opex/t declined 14% YoY, led by a 24%/8% YoY drop in variable cost/freight costs. However, other expenses and employee cost/t increased 16%/5% YoY. OPM stood at 0.7% (est. 2%). Interest costs declined 10% YoY (up 3% QoQ), whereas other income grew 53% YoY. ICEM reported a net loss of INR814m vs. a net loss of INR1.4b in 2QFY23.

* In 1HFY24, revenue declined 3% YoY to INR26b due to a 5% decline in realization/t, partly offset by 2% growth in volume. EBITDA stood at INR131m vs. an operating loss of INR605m in 1HFY23. Net loss stood at INR1.6b vs. INR2.1b in 1HFY23. OCF stood at INR956m vs. INR2.9b in 1HFY23 and capex stood at INR7m vs. INR1b in 1HFY23

Highlights from the management commentary

* Cement prices were increased and stabilized in the south market, backed by improved demand in the region. A price hike will help to offset the cost increase.

* Fuel costs stood at INR2.04/kcal vs. INR2.3/kcal in 1QFY24. Fuel cost is estimated to remain at a similar level until Dec’23.

* For Shipping/Windmill/RMC, revenue stood at INR56m/INR106m/INR286m, while EBITDA came in at INR10m/INR86m/INR13m in 2QFY24

Valuation expensive; reiterate Sell

* ICEM lost a significant market share (800bp+ over FY10-23) due to a lack of capacity additions. We expect its market share loss in the south to continue given capacity additions by peers.

* Net debt stood at INR28b vs. INR29b as of Mar’23. We would monitor the progress on divestment of non-core assets (land). ICEM’s valuation at 13.3x FY25E EV/EBITDA appears expensive. We reiterate Sell with a TP of INR150 premised on 10.5x Sep’25E (earlier FY25E) EV/EBITDA

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