Heidelberg Cement India -3QFY18 Result Update - Higher Sales Volume Drives Performance

Led by higher-than-expected sales volume and higher average NCR, Heidelberg Cement India (HCIL) has reported a healthy performance in 3QFY18. Despite a surge in operational cost, its EBITDA grew by 93% YoY to Rs754mn vs. our estimate of RsRs722mn. Its sales volume grew by a strong 16% YoY and 15% QoQ to 1.22mnT owing to improved demand in Central markets led by pick-up in construction activities following improved sand/aggregates availability. While average NCR stood at Rs3,976/tonne (+7.6% YoY and +0.3% QoQ), EBITDA/tonne came in at Rs620 vs. Rs373 and Rs825 in 3QFY17 and 2QFY18, respectively. Operating cost/tonne surged by 1% YoY and 7% QoQ to Rs3,356 owing to significant spike in freight and input cost. We believe that demand recovery in central region owing to improved sand availability and increase in government’s spending will continue to aid HCIL for healthy volumes, going forward. Further, visible up-tick in realisation is also expected to ensure margin expansion.

Robust Growth in Sales Volume

Sales volume grew by 16% YoY and 15% QoQ to 1.22mnT mainly due to: (a) low base; (b) improved sand availability; and (c) increase in government’s spending in UP. Further, the Management highlighted that the demand continued to remain healthy in Jan’18, as construction works – especially in rural and IHB segments, which were withheld due to sand crisis – are supporting demand. Looking ahead, we expect HCIL’s volume to remain healthy in coming quarters as well.

Decent Operational Performance despite Cost Pressure

Despite a surge in operational cost, its EBITDA grew by 93% YoY to Rs754mn marginally ahead of our estimate of Rs722mn. While operating cost/tonne rose by 7% QoQ due to higher input and freight cost, a reduction in power and fuel cost/tonne (led by WHRS) aided HCIL to contain any further rise in operating cost. EBITDA/tonne came in at Rs620 vs. Rs373 and Rs825 in 3QFY17 and 2QFY18. Considering the recent spike in average realisation in its key markets, we expect its operational performance to improve further in current quarter. PAT came in at Rs318mn as against net loss of Rs36mn in 3QFY17.

Outlook & Valuation

Notably, with no meaningful capacity addition coming in the central region in next 2-3 years (except capacity ramp-up at UltraTech’s newly acquired capacity) along with visible pick-up in demand led by rise in construction activities in UP following resolution of sand issues, we believe that HCIL would hit a sweet spot to gain traction in ensuing years. Further, visible de-leveraging of balance-sheet (repaid US$20mn in YTD) and healthy operating efficiencies are expected to result in improvement in return ratios. We maintain our BUY recommendation on the stock with a revised Target Price of Rs205 (9x FY20 EBITDA).


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