Results below expectations- Earnings downgrade
HOLD
CMP: Rs 113 Target Price: Rs 129
India Cement Q2FY10 pre exceptional net profit Rs1.38bn (-22.4% yoy) was below expectations (Rs1.49bn) mainly on account of higher tax rate. However, the reported profit for the quarter have seen increase by 2% due to the exceptional losses on forex and dry docking expenditure that company incurred in Q2FY2009. Cement revenues grew by 7.2% yoy to Rs9.6bn driven by volume (2.79 mt) growth of 15%, where as blended realizations (including clinker realisation) declined by 6% yoy to Rs3439/ton. Pure cement realisation though have declined 3.2% (Rs120/ton) yoy and 3.9% (Rs146/ton) qoq, showing the significant reduction in cement prices in key markets. However with clinker sales resulting in lower value additions and 44% increase in staff cost (on account of Rs85 mn employee bonus, which usually is included in H2) ICL's EBIDTA for the quarter declined by 2.2% yoy to Rs2.98bn (though in line with estimates). Resultant, EBITDA margin have declined by 210bps to 30.1% while blended EBIDTA/tonne has declined by 12.9% y-o-y to Rs1006/tonne (lower value addition on clinker sales).
Owing to softening cement prices in ICL key markets of AP (20% of sales) and Tamil Nadu (40% of sales) we ICL's expect realizations to fall further over coming quarters. On account of this and lower than expected earnings for the quarter, we are downgrading our earnings by 9% and 8.4% for FY10E (EPS of Rs18.2) and FY11E (EPS of Rs20.3) respectively. At current levels, the stock is trading at 5.6x FY11E earnings and USD79.3 FY11E capacity. We maintain our HOLD rating on the stock, while we lower our target to Rs129 to factor in earnings downgrade.
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