Focus on volume growth, cost reduction

Focus on volume growth, cost reduction

Last month, we analysed the quarterly results of the top three cement producers. It´s now time to look at the performance of the next-in-line firms in the sector.
Shree Cement: The volume growth strategy continues
Shree Cement continues to deliver robust volume growth (much ahead of the industry) at 31 per cent y-o-y. Given the robust volume growth, realisation fall of ~5 per cent q-o-q in the March 2016 quarter is reasonable.

Shree continues to command the richest valuations in the sector, given its unparalleled cost leadership and capability of delivering robust volume with stable EBITDA. It has consistently proven its inherent strengths and is structurally best placed to gain the most with a demand revival.

However, valuation re-rating will not happen unless there is volume-growth calibration with an intent to materially improve price realisations. Given rich valuations of $210 EV/tonne (~1.7x replacement cost), the stock will remain range-bound. We expect limited re-rating as and when EBITDA/tonne breaches the Rs 1000 mark.

Dalmia Bharat & OCL: Performance delivery continues
DBEL´s EBITDA beat consensus and our estimates by 30 per cent and 35 per cent respectively. We did expect the numbers to follow a robust growth trajectory Q1FY17 and onwards, but it was a positive surprise to see the growth coming in from Q4 itself. Notably, a large chunk of the growth at DBEL in Q4 is also driven by internal efficiency. On the top-line front, despite delivering a 21 per cent y-o-y volume growth, DBEL has managed its realisations well and this is commendable.

The stock will trade at par with replacement costs (~$120/tonne). In our opinion, the only risk to the potential re-rating trigger here will be any attempt by DBEL to add more capacities to its portfolio through the inorganic route, thereby increasing its debt further.

JK Cement: Delivered on operating performance
There were no operating disappointments in March 2016. JKCE beats our/consensus estimates by 19 per cent /27 per cent, driven by cost efficiency. Despite volumes and realisations being lower than expected, its operating performance was robust. Cost savings (with the Mangrol expansion) were a key factor. Blended EBITDA/tonne at Rs 794 (-5 per cent y-o-y, +27 per cent q-o-q) was the best in FY16.

Performance will be impacted in H1FY17 on contingencies at the south plant. However, JKCE continues to have the advantage over peers in H2FY17, which will enable it to deliver better volume growth.

India Cements: Volume recovery expected
India Cements (ICL) has delivered on operating performance in Q4. EBITDA was in-line with our estimates and 14 per cent better over consensus.
The long-awaited volume recovery was visible for ICL in Q4. Efforts continue towards cost-optimisation by maximising usage of pet coke. The management commentary sounds optimistic on debt reduction plans for FY17. ICL continues to remain attractive on valuations. At $45/tonne, with a capacity base of ~15 million tonne, and an ability to deliver reasonably high EBITDA (~Rs900/tonne) in FY17, ICL has the potential to receive re-rating.

HeidelbergCement India: Sustained cost savings
Cost savings and debt reduction will help the stock get re-rate. Q4 operating results were marginally lower than our expectations/consensus expectations by 10 per cent/ 5 per cent, largely driven by lower-than-expected volumes. Cost savings have sustained well in Q4 and are likely to improve in FY17. Debt repayment is on the radar and this should help the medium-term valuation re-rating. Valuations are currently attractive ($70/tonne).

Mangalam Cement: Surprises positively despite muted volume growth
Mangalam Cement (MGC) is the only company in Q4 where we have seen a muted volume growth. The result is better realisation management versus its peers. This also goes in-line with our argument that earnings of cement manufacturers will remain more sensitive towards pricing. Volume growth / scale efficiencies will have limited incremental advantage.

This article has been authored by
Vaibhav Agarwal, Vice President - PhillipCapital (India) Pvt. Ltd.

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