India Cements Ltd. (for patient high risk investors) Coverage...India Cements Ltd. (for patient high...

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Page 1: India Cements Ltd. (for patient high risk investors) Coverage...India Cements Ltd. (for patient high risk investors) 2 Industry LTP Recommendation Time Horizon Cement Rs. 122.05 SIP

India Cements Ltd. (for patient high risk investors)

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Initiating Coverage

India Cements Ltd. 21-October-2020

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Industry LTP Recommendation Time Horizon

Cement Rs. 122.05 SIP Buy for 3-4 quarters in Rs.108-136 band 4 quarters

Our Take:

India Cements is one of the largest cement producers of South India with ~67% of sales volume comes from south India region. It has a 3.6% market share in India with 15.55 MTPA cement producing capacity. It offers different cement brands for different geographies with speciality cement and allied products.

We expect that Covid-19 led lockdown and slowdown in the economy will lead to a decline in revenue of India Cements for FY21 but strong prices can help to drive realisation growth. While the company has plans to set up capacity in Damoh, Madhya Pradesh, for which it has a mining lease, we believe elevated debt levels could delay the expansion. The industry has a higher dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy.

Going forward, we expect a gradual recovery in cement demand and volumes are likely to pick-up from H2FY21 onwards. Also, on the demand side, key growth drivers are likely to be picked up in rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and spending on key infrastructure projects.

Valuations & Recommendation: We expect that the company will get benefits from the strong share in South India with its own shipping company and captive power plants. However, in short to medium term Covid-19 led lockdown, lower utilization, shortage of labour, poor balance sheet strength and operational inefficiency compared to peers will adversely impact growth. Investment by Radhakishan Damani group (20.4% stake in company) from Sept 2019 quarter to March 2020 quarter creates a value unlocking opportunity for minority shareholders of India Cements though the timing thereof could be uncertain at this point in time. We expect 7% CAGR in top-line and 74% EPS CAGR over FY20-22E. The Company is trading at EV/T of ~$62/T which is a discount to the current replacement cost of ~$110/T but current lower balance sheet strength and lower operating efficiency compared to peers probably justifies its lower valuation. Every $5.5 rise in EV/T could lead to Rs.20 rise in stock price. At EV/T of $110, the stock price could rise to Rs.295; although we don’t think that kind of value unlocking can happen so soon.

HDFC Scrip Code INDCEMEQNR

BSE Code 530005

NSE Code INDIACEM

Bloomberg ICEM:IN

CMP Oct 20, 2020 122.05

Equity Capital (cr) 310

Face Value (Rs) 10

Eq- Share O/S(cr) 31.00

Market Cap (Rscr) 3784

Book Value (Rs) 170.0

Avg.52 Wk Volume 10790661

52 Week High 140.00

52 Week Low 69.45

Share holding Pattern % (Sept, 2020)

Promoters 28.42

Institutions 21.66

Non Institutions 49.92

Total 100.0

Fundamental Research Analyst Jimit Zaveri [email protected]

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Financial Summary

Particulars (Rs cr) Q1FY21 Q1FY20 YoY-% Q4FY20 QoQ-% FY19 FY20 FY21E FY22E

Total Operating Income 763 1496 -49% 1176 -35% 5,770.4 5,186.4 4,973.8 5,918.8

EBITDA 156 243 -36% 72 117% 625.7 597.7 614.5 784.3

APAT 19 64 -70% -10 -287% 21.1 50.4 22.1 152.9

Diluted EPS (Rs) 0.65 2.08 -69% -0.34 -291% 0.7 1.6 0.7 4.9

RoE-% 0.4 1.0 0.4 2.9

P/E (x) 178.2 74.4 169.8 24.5

EV/EBITDA 11.4 12.0 11.7 9.1 (Source: Company, HDFC sec)

Q1FY21 Result Update

• The volumes of the company were impacted due to nation-wide lockdown and are also expected to remain subdued in the monsoon season. The volumes of the company have degrown by 53% Y-o-Y to 1.43MTPA. NSR (Rs/T) has grown by 9.80% to Rs.5301/t, Y-o-Y.

• The drop in volume alone had accounted for a contribution loss of more than Rs.216 crores. However, with the improved realization and reduction in overall expenditure, the EBIDTA was at Rs.159 crores as compared to Rs.245 crores in the previous year. EBIDTA/T has improved YoY by 37.11% to Rs.1090/T.

• Robust price recovery in the south, benign fuel cost, and strong discretionary cost control buoyed the margin, thus moderating the earning impact.

Long term Triggers Strong presence in the south region with a presence among other regions

India Cements is one of the largest producers of cement in south India with a strong presence in South India. It has diversified presence

over the different regions of India such as West India and south-west India. Diversified locational presence helps to take advantage of

pricing and demand in different regions. It generates ~67% of total sales volume from south India market and the remaining revenue

comes from other regions. India Cements has 8 operating units in Tamil Nadu, Telangana, Andhra Pradesh and Rajasthan with a capacity of

15.55 million tonnes per annum. This is apart from the 2 cement grinding plants - one at Chennai, Tamil Nadu and other at Parli,

Maharashtra.

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India Cement's brand in a different region

Source – Company, HDFC sec Research

The company has also got plans to put up an additional grinding unit at Khandwa in Madhya Pradesh which will be taken at the appropriate time along with capacity enhancement in Rajasthan plant. The India Cements Ltd. (ICL) is working on expanding its production capacity from the existing 15.55MTPA to 20MTPA in coming years. ICL has already started the groundwork for an integrated plant at Damu in Madhya Pradesh and a grinding unit in Uttar Pradesh. The expansion programme is expected to involve an investment outlay of Rs.1,300-1400 crore Management guidance on the timeline of the proposed expansion is yet to announced.

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Working on enhancing operational efficiency

The company has a plan for capacity upgrades at its Dalavoi and Sankari plants. The company is in the advanced stage of putting up a new

cement mill replacing the old energy in-efficient cement mills at its Sankarnagar plant with a marginal increase in capacity. The raw

material required to the cement plant is being met from the Captive mines located adjacent to a cement plant in Chilamkur village over an

extent of 602.137 Ha (hectares) and resources of about 273.38 Million Tonnes is located at Chilamkur village, Yerraguntla Mandal, YSR

Kadapa District, Andhra Pradesh. The Company has purchased 184.53 Ha of limestone bearing lands at Pawai Tehsil, Panna District and

68.55 Ha of land for setting up of a cement plant at Gaisabad Tehsil, Damoh District in Madhya Pradesh. As regards plant operations,

necessary Terms of Reference (TOR) has been obtained and the process of obtaining environmental clearance is in progress. The area is

well connected by road and rail which helps in smooth logistics.

India Cement owns captive power plants which help to reduce energy costs and help to boost operating profitability. The company has its

captive power plant of 50-MW capacity at Sankarnagar to cater to the energy needs of cement plants in Tamil Nadu, 50- MW capacity &

8.5-MW waste heat recovery plant at Vishnupuram in Telangana, 9.9 MW wind farms at Palladam, 8.75 MW wind farms at Thevarkulam in

Tamil Nadu and 20 MW captive power plant is in operation in Banswara Plant, Rajasthan. The company owns power plant in Vijjeswaram

in Andhra Pradesh with a capacity of 21.5 MW and gas-based power plant of 26.25 MW capacity at Ramanathapuram in Tamil Nadu

through its subsidiaries Andhra Pradesh gas power Corporation and Coromandel Electric Company Ltd. The power from Waste Heat

Recovery System also increased marginally during FY20 to 6.10 crores units from 5.90 crores units in FY19 and could meet up to 6% of the

overall requirement of power resulting in cost savings.

The India Cements plant at Chilamkur (near Yerraguntla in Andhra Pradesh) has started loading wet fly ash to its plant in Vishnupuram,

near Miryalaguda in Telangana. This is the first time that fly ash is being loaded by Railways from this plant. Previously, the company used

to transport the same through roadways.

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Source – Company, HDFC sec Research

Strong pricing with a stable realization

The industry has witnessed a strong pricing M-o-M and Y-o-Y which has improved realization and profitability. The sharp price hike is taken

in late April and sustained in later months of 2020. Faster traction in rural/semi-urban cement demand (before monsoon hits), came to the

rescue for the industry. Strong prices and lower costs will help to improve profitability.

Source – Company, HDFC sec Research

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Investment by Radhakishan Damani:

Radhakishan Damani group has built a stake of 20.4% in India Cements from Sept 2019 quarter to March 2020 quarter. This seems to have

been acquired in the Rs.80-90 band. Post this news becoming public, the stock price rose further and has stayed high despite not so

encouraging results in Q1FY21. According to the management, no discussions have happened with strategic shareholder Radhakishan

Damani regarding the possibility of an ownership change. Going by his past investments, the acquisition of majority stake by Radhakishan

Damani may not be hostile. Given the scope of improvement in operational parameters, large reserves of limestone (including in UP/MP),

rising auction prices of limestone mines by State Govts, and low valuations, Mr Damani may have found a good value unlocking

opportunity in India Cements.

How will this thing pan out:

India Cements was anyway under pressure for poor operational performance, intercompany investments/advances and non-core

ventures. The management will come under pressure to correct this at a hastened pace. Unravelling intercompany investments/advances

is the difficult part and for this the current promoter needs liquidity in his personal hands which can come by unloading part/full stake in

India Cements.

The current promoter can invite white knights to ward off this threat. However, anyone who will come in to help will lay his own

conditions.

The current promoter may invite Mr Radhakishan Damani on board and implement his suggestions to improve the performance of the

company in a given time frame. Also, the intercompany investments/advances will need to be reversed and non-core investments to be

sold off. In such a case professional management may be appointed to achieve these objectives including hiring cement industry

specialists. Anyway, the operating costs per ton for India Cements are about 5% higher than the industry average and its operating profit

margins are about 400-1000 bps lower than similar sized peers though not necessarily in South India; these may be low hanging fruits for

turning around operations. This route will also help the current promoters to reap the benefits of the expansion plans in MP/UP that have

currently been put on hold due to lack of funds and bandwidth at the top.

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The current promoter may do none of these and continue as it is as long as stake of Mr Radhakishan Damani remains at this level.

However direct/indirect pressure may start building up on the current promoters over the next few quarters to take any of the above

actions.

In any of the above options, minority shareholders could benefit given the fact that the company is available at almost the lowest EV/T in

the industry among similar sized peers. However, timeline of this happening is uncertain. Also, if the current promoter goes into litigation

to prevent any change in status quo, then again the timelines could get further extended.

What could go wrong

Covid-19 led lockdown and slowdown in the economy affect future growth

It is expected to cement demand will fell in Q1FY21E by up to ~45% and will experience degrowth in QFY21E. A decline in cement demand

in Q4FY20 and FY21 will bring down capacity utilization of cement companies. Growth in the housing segment, that forms 60%-65% of

cement demand, is likely to be affected given the impact of the slowdown in economic growth as lower income growth and income cuts

will result on lower discretionary spending over the next year.

Source – Company, HDFC sec Research

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Post lockdown, June-20 has witnessed early monsoon in few parts of the country. Due to cyclone Nisarga, western India, central India and

several parts of northern India has witnessed nearly 5-10 days early monsoon so it has shattered expectation of improvement in cement

demand in June-20.

Majority of the construction labourers have returned to their homes and are reluctantly returning to join work even after the stagewise

lifting of lockdown. Reduced availability of truck drivers is impacting inward and outward logistics.

However, the COVID-19 induced self-isolation impaired the home buying sentiments that has created an adverse impact on weak balance

sheet builders and they tend to defer launches of new projects.

Fall in volumes will result in lower capacity utilization resulting in lower operating leverage.

Poor financial and weak balance sheet impact adversely

Lower capacity utilization and degrowth in volume can affect the financial profile of the company for the mid-term. India Cements has

lower return ratios which is expected to remain subdued due to tough economic conditions with lower demand for cement. The working

capital cycle of the company is worsening due to higher debtor days and inventory days. Worsening working capital again puts pressure on

the balance sheet. Management highlighted that industry in southern India has witnessed a shift from credit-based sales to cash-and-

carry, leading to improved liquidity for India Cements. Management focus on reducing debt can help to deleverage balance sheet at some

extent.

Source – Company, HDFC sec Research

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India Cements has lower interest coverage which will negatively impact the profitability of the company and it will become difficult for the

company during tough times. The company has poor financials compared to its peers which drags down the performance of the company

and valuation over a period of time.

Source – Company, HDFC sec Research

The company has exposure to different group companies

India Cement has exposure to different group entities worth of Rs.1852 cr (Rs.736 cr investments and Rs1116 cr loans) as on FY20 which is

~34.78% of its total net worth and ~20.59% of balance sheet size. In addition to above, India Cements has also extended corporate

guarantee to the bank facilities availed by its group companies worth of Rs.140 cr. Majority of group companies either incurring losses or

having a negative net worth due to which liquidity of India Cements has got stuck. India Cements has to repeatedly write off/make

provisions against the above year after year. Promoter has pledged 27.03% of their 28.14% stake in the company.

Delay in capacity expansion plans can impact growth

ICL has undertaken a greenfield expansion project in the central region whereby the plan is to set up a 1.5 MT clinker unit in Madhya

Pradesh and grinding units in Uttar Pradesh with a cumulative capex of Rs 1300-1400 cr. Any longer than expected delay in terms of

expansion schedule and commencement of plan would impact its growth.

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About the Company

India Cements Ltd. was established on the year 1946 by Shri S N N Sankaralinga Iyer and Sri T S Narayanaswami. The company set up its

first plant in 1949 at Sankarnagar (Talaiyuthu). India Cements has now over a 15.55MTPA capacity. ICL owns and operates ten cement

manufacturing units (including two split grinding units) in the states of Telangana, Andhra Pradesh (AP), Tamil Nadu (TN), Maharashtra

(MH) and Rajasthan. The company primarily manufactures two standard types of cement: Ordinary Portland Cement (OPC) and Portland

Pozzolana Cement (PPC), the mix being 35:65. It owns shipping (owns 3 ships- helps in import cargoes of Coal, Gypsum and Limestone),

captive power, and coal mines (in Indonesia).

Brands

Source – Company, HDFC sec Research

Industry India is the second-largest cement producer in world. The cement industry occupies an important place in the Indian economy because of

its strong linkages with other sectors such as construction, transportation, coal and power. The sector notably plays a critical role in the

economic growth of the country, in its journey towards inclusive and decidedly conclusive growth. The construction sector alone

constitutes about 7 per cent of the country's gross domestic product (GDP). India is the second-largest producer of cement in the world

after China, with an installed capacity of ~509 MTPA. Presently, the Indian cement industry has 225 plants, owned by 65 players.

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Lower per capita cement consumption in India

Source – Statista, Shree Cement earning presentation, HDFC sec Research

Although India is among the leading producers of cement in the world, its per capita cement consumption is at 200-250 kg, which is lowest among the developing countries. The world average is 500-580 kg, while countries such as China have a per capita cement consumption of 1650-1750 kg, followed by Vietnam (800-850 kg) and Turkey (700-750 kg). The factors that could trigger cement sales are infrastructural demand especially for Government projects, as well as higher housing demand in rural and semi-urban areas. A higher realization and rising dispatches are considered to be conducive for higher profits for the cement industry. All efforts are targeted to increase sales and reach the premium segment in prices. The government also intends to expand the capacity of the railways and the facilities for handling and storage to ease the transportation of cement and reduce transportation costs. The demand for the cement industry is expected to reach 550-600 million tonnes per annum by 2025 because of the expanding demand of different end users i.e. housing, commercial construction and industrial construction.

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Government thrust on affordable housing for realizing its vision of “Housing for All” by 2022 and Smart City program should also help in demand growth for cement. The rate of new cement capacity additions has also slowed down considerably. Therefore, the outlook for the cement sector looks better. Cement, being a bulk commodity, is a freight intensive industry and long-distance transportation can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. Cement is relatively a highly concentrated industry in India: I) the top 10 companies constitute> 60% of the market; ii) the top 5 companies enjoy a market share of around > 48%, and iii) the top 2 cement groups (Lafarge Holcim and Aditya Birla Group) enjoy a market share of around 38%. Peer Comparison as per FY20 Financial

Company CMP (As on 20-

10-2020) Mcap (Rs. Cr.)

Capacity (MTPA)

OPM% NPM% RoE% RoCE% D/E(x) TTM P/E

(x) TTM

EV/T ($) EBIDTA/T

(Rs.)

India Cements 122 3784 15.6 12 1 1 4 0.7 189 63 530

ACC 1579 29681 33.4 15 9 12 17 0.0 24 102 781

Ambuja Cement 251 49919 29.7 17 8 9 17 0.0 19 182 897

Dalmia Bharat 815 15892 26.5 22 2 2 5 0.5 55 104 1091

Shree Cement 21150 76353 40.4 29 12 13 16 0.2 51 266 1458

The Ramco Cement 782 18432 16.5 21 11 12 13 0.6 35 177 981

Ultratech Cement 4547 131238 114.8 22 9 12 14 0.7 24 175 1141

Company Regions wise Presence

North West South East Central

India Cements Y Y

The Ramco Cement Y Y

Ultratech Cement Y Y Y Y Y

ACC Y Y Y Y Y

Ambuja Cement Y Y Y Y Y

Dalmia Bharat Y Y Y

Shree Cement Y Y Y Y

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Financials Income Statement Balance Sheet

(Rs Cr) FY18 FY19 FY20 FY21E FY22E As at March FY18 FY19 FY20 FY21E FY22E

Net Revenue 5267 5770 5186 4974 5919 SOURCE OF FUNDS

Growth (%) 2.0 9.6 -10.1 -4.1 19.0 Share Capital 308.2 309.9 309.9 309.9 309.9

Operating Expenses 4558 5145 4589 4359 5134 Reserves 4961 4936 4960 4973 5098

EBITDA 709 626 598 615 784 Minority Interest 40 54 55 54 55

Growth (%) -20.2 -11.8 -4.5 2.8 27.6 Other Equity & Liabilities 0 0 0 0 0

EBITDA Margin (%) 13.5 10.8 11.5 12.4 13.3 Shareholders' Funds 5309 5300 5325 5337 5463

Other Income 24.5 39.2 41.7 30.0 30.0 Long Term Debt 2878 2691 2830 2873 2758

Depreciation 279.0 264.7 256.0 268.2 278.4 Long Term Provisions & Others 829 800 839 854 883

EBIT 455 400 383 376 536 Total Source of Funds 9017 8792 8994 9064 9104

Interest 364.8 350.4 343.2 339.8 324.6 APPLICATION OF FUNDS

Exceptional Items 0.0 0.0 -13.8 0.0 0.0 Net Block 7322 7267 7640 7685 7780

Shares of Profit in Joint Ventures (net of Tax) -1.1 1.2 -2.6 -2.6 -2.6 Non-Current Investments 356 369 376 406 415

PBT 89 51 24 34 209 Deferred Tax Assets (net) 0 3 0 0 0

Tax 19.2 24.5 -30.0 8.5 52.5 Long Term Loans & Advances 1326 1330 1370 1383 1439

RPAT 69 26 54 25 156 Other Assets 0 0 0 0 0

Minority Int. -4 -5 -3 -3 -3 Total Non Current Assets 9005 8969 9386 9475 9634

APAT 65.1 21.1 50.4 22.1 152.9 Current Investments 2 2 2 2 2

Growth (%) -60.8 -67.6 139.4 -56.2 591.9 Inventories 695 847 842 777 924

EPS 2.1 0.7 1.6 0.7 4.9 Trade Receivables 645 746 736 722 843

Short term Loans & Advances 397 572 744 781 812

Cash & Equivalents 54 49 43 129 76

Other Current Assets 149 116 157 158 161

Total Current Assets 1941 2331 2524 2570 2819

Short-Term Borrowings 156 356 752 699 727

Trade Payables 1186 1352 1324 1206 1407

Other Current Liab & Provisions 586 798 838 1073 1212

Short-Term Provisions 1 2 2 3 3

Total Current Liabilities 1929 2508 2916 2981 3349

Net Current Assets 12 -177 -392 -411 -530

Total Application of Funds 9017 8792 8994 9064 9104

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Cash Flow Statement Key Ratios

(Rs Cr) FY18 FY19 FY20 FY21E FY22E FY18 FY19 FY20 FY21E FY22E Reported PBT 89 51 24 34 209 Profitability (%)

Non-operating & EO items -25 -39 -42 -30 -30 EBITDA Margin 13.5 10.8 11.5 12.4 13.3

Interest Expenses 365 350 343 340 325 EBIT Margin 8.6 6.9 7.4 7.6 9.1

Depreciation 279 265 256 268 278 APAT Margin 1.3 0.5 1.0 0.5 2.6

Working Capital Change -484 184 210 105 65 RoE 1.2 0.4 1.0 0.4 2.9

Tax Paid -19 -25 30 -9 -53 RoCE 5.0 4.6 4.3 4.2 5.9

OPERATING CASH FLOW ( a ) 204 787 821 708 795 Solvency Ratio

Capex -206 -203 -629 -313 -373 D/E 0.6 0.6 0.7 0.7 0.6

Free Cash Flow -2 583 193 395 421 Interest Coverage 1.2 1.1 1.1 1.1 1.7

Investments -75 -19 -44 -44 -64 PER SHARE DATA

Non-operating income 25 39 42 30 30 EPS 2.1 0.7 1.6 0.7 4.9

INVESTING CASH FLOW ( b ) -256 -183 -632 -327 -408 CEPS 11.2 9.2 9.9 9.4 13.9

Debt Issuance / (Repaid) 405 -216 177 58 -86 BV 171 169 170 170 175

Interest Expenses -365 -350 -343 -340 -325 Dividend 1.0 0.8 0.8 0.4 1.0

FCFE 38 17 26 113 10 Turnover Ratios (days)

Share Capital Issuance 4 16 1 -1 1 Debtor days 45 47 52 53 52

Dividend -31 -30 -30 -12 -31 Inventory days 51 49 59 57 57

FINANCING CASH FLOW ( c ) 13 -580 -195 -295 -441 Creditors days 100 90 106 101 100

NET CASH FLOW (a+b+c) -39 23 -5 86 -54 Working Capital Days -5 6 5 9 9

VALUATION

P/E 57.7 178.2 74.4 169.8 24.5

P/BV 0.7 0.7 0.7 0.7 0.7

EV/EBITDA 10.1 11.4 12.0 11.7 9.1

Dividend Yield 0.8 0.7 0.7 0.3 0.8

Dividend Payout 2.2 117.7 49.2 56.1 20.3 Source: Company, HDFC sec Research

One Year Price Chart

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India Cements Ltd. (for patient high risk investors)

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