Hold stocks of India Cements target of Rs 101

“India Cements, though southern cement prices in 4Q remaining strong, (+1% qoq), India Cement’s (ICEM) realisation came in flat qoq at Rs4245/t (+11.4% yoy) lower than estimates of Rs4345/t. This coupled with a 1.4% qoq increase in costs led to a sharply disappointing profitability performance from ICEM as the 4Q EBIDTA/t at Rs819 came in significantly below our (Rs981/t) & street estimate. Hence EBIDTA for the quarter at Rs2.15 bn though up a healthy 20% yoy came in lower than estimates (Rs2.7 bn). Consequently APAT for the quarter at Rs649 mn (+19% yoy) also came in lower than estimates. Cement revenues grew a modest 13.6% driven entirely by 11.4% yoy improvement in cement realisation even as the volumes grew at a tepid pace of 2% yoy.”

“On the cost front ICEM continued to witnessed cost pressure as its cost increased 1.4% qoq to Rs3426/t. This is even as we saw declining cost trend for other cement companies in the quarter (Ultratech’s cost -1% qoq, ACC’s cost -6% qoq, Ambuja’s cost - 8.2% qoq). The cost increase was largely driven by 4% sequential increase in freight cost led by higher lead distance & marginal effect of rail freight hike. Even staff cost on an absolute basis increased (+26% qoq) led by provisions for directors remuneration and unclaimed leaves. We expect cost pressure to continue for ICEM as the recent cost increases like railway freight hike & excise duty hike will put further pressure. However the cost pressure is expected to ease in H2FY13 as the company is expected to draw coal requirements from its captive mines in Indonesia (First Coal expected in Q2FY13).”

“4Q cement demand in the southern region jumps ~8-9% showing some signs of revival. However we remain uncertain on the sustainability of this uptrend given the sporadic upsurge of Telangana issue in AP. Given this backdrop we believe that ICEM’s valuations at PER 11x, EV/E of 5.9X leaves little upside considering that ICL’S RoCE (10.3% for FY12) is still below the cost of capital - Maintain HOLD,” says Emkay Global Financial Services research report.