India Cements reported weak numbers, led by a sharp slump in cement sales (-11% y-o-y), which, coupled with a weak pricing environment, led to profitability falling to R279/tonne. While we factor in a sharp recovery in profitability over the next two years (Ebitda of R755/tonne in FY2016E), valuations do not fully factor risk to earnings. At 7X EV/Ebitda on FY2016E earnings, ICEM trades at a 17% premium to its historical multiples, despite factoring a sharp earnings revival. Accordingly, we recommend investors to book profits and downgrade the stock to ‘reduce’ from ‘add’ with a revised target price of R90 from R60.
ICEM reported net sales of R1,080 crore (-9% y-o-y, 4% q-o-q), operating profit of R74.2 crore (-56% y-o-y, -49% q-o-q) and net loss of R30.6 crore (net income of R26.3 crore in 4QFY13, net loss of R2.4 crore in 3QFY14) against our estimates of R1,260 crore, R200 crore and net income of R39.7 crore, respectively.
Sharp volume decline (-11% y-o-y) and steep cost inflation (+11% y-o-y) led to the large miss in Ebitda. Higher-than-estimated other income (due to gains on sale of land) was not enough and ICEM reported net loss of R30.6 crore against our estimate of net income of R39.7 crore.
Reported loss of R160 crore includes (a) losses of R57.1 crore on settlement towards exit from CDR; and (b) losses of R69.4 crore due to provision for fuel surcharge adjustment, levied by APSEB.
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