India Cements (ICL) has reported a better-than-estimated performance mainly owing to substantial reduction in staff cost and lower-than-expected freight cost. EBITDA stood at Rs1.67bn (-11% YoY and -8% QoQ) vs. our estimate of Rs1.3bn. Cement EBITDA/tonne stood at Rs628 vs. Rs694 and Rs647 in 3QFY17 and 2QFY18, respectively. ICL’s operating cost/tonne (cement) dipped by 4% YoY and 5% QoQ to Rs3,715 due to lower staff cost (-17% YoY and -28% QoQ) and freight cost/tone (-6% QoQ). Sales volume stood at 2.73mnT (+0.6% YoY and +0.9% QoQ). However, average NCR dipped by 5% each in YoY and QoQ to Rs4,343/tonne. On the flip side, continuing to move northwards gross debt surged by Rs1.0bn QoQ to Rs33.6bn (Rs29.2bn in FY17), which can be a key near-term headwind for the stock, in our view. Thus, trimming down our EBITDA estimate by 15% and 11% for FY18E and FY19E, respectively to factor in soft volume and subdued realisation, we maintain our BUY recommendation on the stock with a revised Target Price of Rs220 (from Rs200 earlier).
Sales Volume Growth Remains Soft
Continued pressure in its key markets i.e. TN, Kerala and Maharashtra owing to various reasons led to soft sales volume growth, which stood at 2.73mnT (+0.6% YoY and +0.9% QoQ) in 3QFY18. However, the recent Supreme Court’s order to allow sand quarrying in TN can aid ICL the most to improve its volume in coming months. Further, pick-up in construction activities in Maharashtra markets is likely to aid ICL in the current quarter in improving its sales volume.
Cost Rationalisation Aids Operational Performance
Cost rationalisation through downsizing headcount in non-core division and winding-up of Infrastructure division aided ICL to save on staff cost, which dipped by 17% YoY and 28% QoQ to Rs764mn. Further, QoQ decline in freight cost also aided its operating profit. Thus, despite 11% YoY and 8% QoQ decline, its reported EBITDA at Rs1.67bn exceeded our estimate of Rs1.3bn. Further, the recent surge in Southern realisation and possibility of higher volume in TN are likely to aid ICL to improve its operational performance further in coming quarters. Interest cost rose by 8% YoY and 4% QoQ to Rs924mn, while net profit stood at Rs152mn (-56% YoY).
Outlook & Valuation
An unexpected reduction in staff and freight cost was the key reason for outperformance. However, spike in gross debt in 9MFY18 and no visible sign of balance-sheet deleveraging amid no capacity addition are likely dilute ICL’s growth prospects. However, we consider attractive valuations (7.9x FY18E and 6.3x FY19E EBITDA) as positive. Further, early signs of demand revival in TN are likely to benefit ICL the most. Rolling over our estimates to FY20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs220 (8x FY20 EBITDA).
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