India Cements - Strong EBITDA performance

ICEM's PAT shows a drop of 22%, but EBITDA growth was 13% in 1QFY09, despite subdued volume growth. We expect volume momentum to recover and raise our EPS estimates marginally. Our target price remains Rs215 and we rate it a Buy.

EBITDA performance better than we expected
ICEM recorded EBITDA growth of 13% in the first quarter despite volumes being just 3.5% higher. Despite facing a cost escalation of Rs207/mt, it recorded an increase in yoy EBITDA/mt of Rs103/mt. Apart from better pricing, this was achieved by higher production of blended cements (65% to 71%) and optimum usage of low-cost power from its gas-based captive power units. ICEM's PAT declined 22% as its tax provisions were raised to 31.5% from 14.5%, and it recorded a translation FOREX loss of Rs217.5m. ICEM accounted for a marginal cash profit of Rs10m from its interest in India Premier League cricket.

India Cements is well funded for executing its growth plans
ICEM seems to be making good progress in all its committed brownfield expansion plans: the grinding unit in Chennai; the enhancement of capacity at Vishnupuran; additional 1.2mmt capacity in Malkapur; and an additional grinding unit at Parli. It expects to commission these new plants in 3QFY09. ICEM raised equity of Rs5.92bn in the last financial year for part-funding of its 4mmt greenfield expansion plans.

Cement prices could come under pressure in 2009
We forecast an incremental capacity addition of 75.6mmt over the next two years, compared with incremental demand of 39.8mmt. While most of the new capacity commissioned this year will go into full-stream production only in 2010, we forecast a surplus of 23.6mmt (which represents 9% of the cement industry's capacity) in FY2010. We have modelled a 5% drop in realisations in FY2010 and as a consequence expect the EBITDA/mt to fall by Rs176/mt to Rs1007/mt.

Maintain Buy with a target price of Rs215
We have raised our FY09F EPS by 1.7%, and for FY10F by 3.8% We have adjusted for slightly lower volumes in 1QFY09 and also the better EBITDA/mt in 1QFY09. ICEM trades at a EV/mt of US$84/mt which is at a 30% discount to its replacement cost, on our estimates. We value ICEM on an EV/EBITDA basis at a 10% discount to the average forward EV/EBITDA of Grasim and Ambuja Cements.