{LONGTERMINVESTORS} Heidelberg Cement (HEIM IN) - Improving cost aid in margin expansion

 

Dear all,

Improving cost aid in margin expansion

 

Ø  HCIL's revenue declined by 3.1% YoY to INR 3.8bn on account of decline in sales volume, by 5.7% YoY to 1mt (due to good monsoon).  However, net realization increased moderately by 2.7% YoY to INR 3,852/tn (due to pricing improvement in central region). During the quarter, company operated at ~77% utilization Vs ~85% in 1QFY17. Trade and Non-trade mix for central India is ~80:20.

Ø  EBITDA rose 44% YoY to INR 726mn; EBITDA margins improved by 620bps YoY to 18.9% due to reduction in power & fuel cost (commissioning of WHRP at Narsingarh), lower cost for bags and other expenses. Net profit increased to INR 165mn Vs INR 22mn in 2QFY16 driven by higher margins and other income.  EBITDA per ton for this quarter stood at INR 727 Vs INR 476 in 2QFY16.

Valuation: At CMP the stock trades at EV/EBITDA of 11.2X and 8.3X FY17E&18E respectively.  We assign an Outperformer rating with a target price of INR 118 based on EV/EBITDA multiple of 9X FY2018E. We believe the valuation is justified given expected improvement in margins and an improvement in demand-supply scenario over the next two years.

Risks: Delay in economy turnaround, lower than expected infrastructure spending, adverse movement in coal/pet coke prices.

 

Regards,

CSEC Research

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