India Cements - 2QFY17 Result Update - Sound Performance Continues
India Cements (ICL) has delivered healthy performance in 2QFY17 with its operating profit standing at Rs2.24bn (-2% yoy & +11% qoq) vs. our estimates of Rs2.07bn. Cement EBITDA/tonne came in at Rs892 and EBITDA margins stood strongly at 17.2%. A substantial sequential rise in Power & Fuel cost/tonne (+8% qoq) and freight/tonne (+6% qoq) led to 6% qoq rise in cement operating cost/tonne. However, improved operating synergies through improvement in fuel mix kept yearly cost under control. Sales volume – including exports – improved strongly (+11% yoy & +2% qoq) to 2.40mnT owing to increased sales volume in outside Southern markets. While improved sales in Western, Northern & Eastern markets led to 3.5% yoy decline in realization, significant price rise in AP/Telangana markets led to improvement of 6% in sequential realization. Trimming down our EBITDA estimates by 6% & 15% for FY17E & FY18E, respectively to factor in possible impact of demonetizations, which may lead to slowdown in sales volume in the medium-term, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs165.
Healthy Sales Volume Growth
On account of increased footprints in Western, Eastern & Northern markets along with moderate pick-up in Southern markets (especially in Karnataka, AP & Telangana) ICL's sales volume grew by 11% yoy to 2.40mnT. Shipping and wind power contributed ~Rs37mn & ~Rs104mn, respectively to its revenue during the quarter.
Operating Performance Beats Estimates
Operating performance remains healthy and better-than-estimate, with operating income stood at Rs2.24bn (-2% yoy & +11% qoq). Cement EBITDA/tonne stood at Rs892 in 2QFY17 vs. Rs996 & Rs835 in 2QFY16 & 1QFY17, respectively. A substantial sequential rise in Power & Fuel cost/tonne (+8% qoq) and freight/tonne (+6% qoq) led to 6% qoq rise in cement operating cost/tonne. However, improved operating synergies through improvement in fuel mix kept yearly cost under control.
Outlook & Valuation
We believe that improving operating synergies and increased usage of petcoke (at ~80%), possible reduction in interest cost with loan repayment/refinancing and likely demand improvement in Southern markets augur well for ICL in the long-term. Further current valuation at US$63 & US$61 in EV per tonne for FY17E & FY18E, respectively appear demanding. Hence, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs165 (6x FY19E EBITDA).
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