India Cements reported weak earnings with 8% yoy decline in Ebitda, 15% below estimates, despite 23% y-o-y growth in revenues aided by the merger of Trinetra and better realizations. Net debt increased by about Rs 2.5 billion reversing the gains of the previous year, though the management attributed it to higher working capital requirements during the quarter. Maintain ‘sell’ rating with a revised target price of Rs 175/share , from Rs 155/share previously.
India Cement reported weak earnings for Q1FY18 with Ebitda of Rs 1.8 billion down 8% y-o-y and 15% below our estimates. The weakness was despite merger of Trinetra with the parent company, yielding 15% y-o-y growth in volumes, and improvement in realizations by 7% y-o-y to Rs 4,828/ton, though below our expectations and that of peers. Adjusted for merger of Trinetra, volumes were flat in Q1FY18. Profitability was impacted by absorption of employee cost related to ESOP accounting (Rs 68 mn), as well as higher power and fuel costs during the quarter aligned to increase in prices of pet-coke. Higher interest cost can be explained by external debt of Trinetra, while a higher effective tax rate of 35% led to net income of Rs 264 million, -40% y-o-y,-23% q-o-q in a seasonally strong quarter.
The management attributed sequential increase in debt to higher working capital credit, typical of the pre-monsoon quarter and remains committed to debt reduction of Rs 2.3 billion through FY18. In our view, it needs to accelerate debt reduction beyond operational cash flows by monetising non-core assets (including land rights) as well as investment and advances given for unrelated businesses. We expect improved demand for the remainder of the current fiscal as demand disruption on account of GST and waning effects of de-monetisation, sandmining issues in Tamil Nadu, and (3) drought situation in Tamil Nadu and Kerala are all on the wane.
The target price revision is on account of raising of target multiple to 6.5X EV/EBITDA (From 6X) and roll forward to June 2019 earnings , from March 2019 even as earnings for FY2018E and FY2019E are revised downwards by 13% and 6% respectively. The earnings revision factors in lower realisations and higher cost of production as reflected in this quarter’s earnings.