Sell India Cements
Published on Wednesday, November 25th, 2009 at 12:42 PMAuthor: insightt95in (165 Articles)
India Cements
Sell
Price: Rs104 Target price (Sep 10): Rs90
Sharp price drop in Southern region to impact ICL
* Southern region experiences sharp price drop: Cement prices have
dropped by Rs20/bag to Rs145/bag in Hyderabad and by Rs30/bag to
Rs210/bag in Chennai in the last month, primarily driven by increased
supplies and slower demand growth. Our Chennai based cement dealer
indicates that prices can drop further by Rs10/bag by end of November
2009. Dealer sources indicate that pricing scenario is expected to
stabilise from March 2010, as most of the government orders are
estimated to start in 4QF10.
* Downgrade earnings on the back of lower realisation outlook:
India Cements (ICL) sells ~85% of its production in the Southern region
and naturally will experience lower realisations. We model cement
realisation drop of c.Rs575/tonne (Rs29/bag) to Rs3,102/tonne till
4QF10 on the base of Rs3,677/tonne in 1QF10. We expect southern
region to be in production level oversupply of c.7 mn tonnes for
FY10/11E, hence pricing environment is expected to be challenging.
* Update on capacity expansion plan: ICL will be completing its
expansion at Clilamakur (AP) in 4QF10 taking the total installed
capacity to 14 mtpa. Company has recently commissioned
enhancement of line I at Vishnupuram, addition of 1.2 mtpa in Malkapur
and 1 mtpa grinding unit at Parli in Maharashtra. ICL has acquired 53%
stake a Indo Zinc (additional 20% by open offer), which will be
executing 1.5 mtpa cement plant at Rajasthan, to be commissioned by
2QF11 at an cost of Rs6 bn. Company plans to add 100 MW thermal
power capacity at its cement plant in Andhra Pradesh and Tamil Nadu at
an cost of Rs5 bn by 1HF11 and acquire a coal mine in Indonesia to
ensure fuel security.
* Maintain Sell with revised target price of Rs90: We believe that
demand slowdown and realisation drop in the Southern region coupled
with lower capital efficiency (lower RoE/RoCE than the peers) will
impact stock valuation. We estimate ICL to report RoCE of 9% and
5.9% for FY10/11E. We lower our EPS estimate for FY10/11 to Rs13.4
and Rs9.2 from Rs17 and Rs15, respectively. We value ICL on EV/tonne
of US$63/tonne to arrive at our Sep 2010 target price of Rs90 (earlier
Rs110, Mar 2010), implying EV/EBITDA multiple of 6.1x for FY11E.
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