Sell India Cements Ltd.

Target Price Rs:- 114
Current market Price Rs:-106.10

• Adjusted loss at Rs449 mn (-132.5% yoy) below estimates (-Rs364 mn). Cement revenues (Rs7.9bn) decline 17.7% yoy – realisation down 15.4% yoy 9.6% qoq
• EBIDTA at Rs286mn down 90.4% yoy – below estimates (Rs435mn) – led by higher than estimated other expenses. EBIDTA/t atRs63 don 94% yoy and 84% qoq
• Downgrade FY11 earnings by 20.2% – maintain FY12 earnings as prices in southern India have bounced back sharply and are now closer to FY12 estimates
• Though we raise or TP to Rs114, ICL’s valuations of 8.2X EV/EBDITA & ~USD 78/t leaves little upside, considering FY12 RoCE at 6.3% is barely half the cost of capital – SELL

Cement revenues down 17.7% – realizations take a 15.4% plunge Net revenues for the quarter declined by 15% yoy to Rs8.4bn (above estimates of Rs8.1bn) on account of higher than expected cement realization and higher IPL revenues booked during the quarter. During the current quarter volumes declined by 2.7% yoy to 2.72mnt impacted by poor offtake in southern India and delay in the stabilization of Chilamakur Cement Plant. Poor demand and excess supply in southern markets resulted in a 15.4% yoy, 9.6 qoq decline in realisation (Rs2909/t)

EBIDTA declined by 90.4% – EBIDTA/tonne at Rs63/t
Sharp drop in realisations, coupled with higher P&F cost (up 10.2%/t yoy due to higher coal prices) and higher RM costs (up 18.9%/t yoy due to soaring fly ash prices), dragged EBIDTA down by 90.4% yoy to Rs286mn. EBITDA margins declined by a massive 2669 bps to a meager 3.4%, while EBIDTA/t declined by 93.7% yoy to just Rs63/t. Though we had factored in significant cost pressure in numbers EBIDTA was below estimates (Rs435mn) on account of 31% yoy increase in other expenditure. Other expenditure increased as it includes additional player compensation and distribution of Champions Trophy price money among players. Consequently, though IPL revenues were higher than estimates, there was negligible contribution at EBIDTA level.

Cost pressures still eating up on margins
On the cost front RM expenses/t (Rs506/t) increased by 18.9% yoy, due to increase in royalty on limestone as well as higher prices of fly ash. Fuel price hike and increase in lead distance led to 31.1% yoy jump in freight costs (Rs685/t). Significant increase in international coal prices and erratic power supply (leading to higher cost of power purchased/Generated through diesel genset -particularly in AP & TN) increased the P&F
costs by 10.2% yoy to Rs964/t. Overall variable cost increased 18.2% yoy to Rs2155/t.

Pre exceptional Net loss at Rs449mn, down 132.5%
ICL’s pre exceptional loss at Rs449 mn declined by 132.5% yoy. The reported loss at ~Rs336 mn, which includes extra ordinary income (forex translation gain of Rs112.5 mn (On USD 745 mn FCCB), declined by 124.1% yoy.

Valuation at EV/EBIDTA of 8.2X EV/ton of USD78 leaves little upside – Maintain SELL
ICL ranks the last in our cement coverage universe as far as return ratios are concerned. Its RoCE (6.3% for FY11) and RoE (4.9% for FY11) are nowhere close to the cost of capital, clearly suggesting destruction of shareholder value. At current levels, the stock is trading at PER 19.9x, EV/EBIDTA of 8.2X and EV/ton of USD78 for its FY12E numbers. These valuations leave little upside considering that ICL’S FY12 RoCE at 6.3% is barely half the cost of capital – Maintain SELL.

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