Highlights:
- Volumes came in at 1.26 MT, declined by 1 percent YoY
- Realisations and cost control measures aided margins
- Demand continues to remain strong in the central region- Valuations expensive, post the appreciation in stock price
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HeidelbergCement India delivered better than expected first quarter results, with the company's earnings registering strong growth. The quarter was marked by a sharp jump in realisations and expansion in margin.
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Quarterly result highlights
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Cement offtake in Q1 FY20 was marginally lower in comparison to the previous quarter as volumes were impacted by capacity constraints and subdued demand. Top line, however, came in 8 percent higher year-on-year (YoY) owing to spike in cement prices. Operational performance was much stronger as higher realisations coupled with operating efficiencies offset a contraction in sales volume.
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Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 32 percent YoY as the margin expanded by 480 bps to 27.1 percent. Rise in other income, along with decline in interest expenses, further boosted net profit, which surged 55 percent YoY to Rs 79 crore.
In terms of operating metrics, cement realisations came in 9 percent higher on the back of price hikes. Decline in raw material costs, along with cost benefits from Waste Heat Recovery System plant and reduction in freight expenditures, supported the margin profile. Despite the 2 percent increase in cost base, the company recorded highest ever EBITDA per tonne rose to Rs 1,251 in Q1 FY20.
Q1 capacity utilisation remains close to 90 percent and stood in-line with previous quarters. Heidelberg’s capacity utilisation in FY19 touched 91 percent on the back of strong demand from infrastructure and housing segments. Given the current capacity utilisation levels, Heidelberg plans to incur a capex of Rs 50 crore to expand its capacity by 0.4 million tonne through a debottlenecking exercise in a phased manner.
In FY19, the company repaid Rs 150 crore of external commercial borrowings. Strong cash flow generation has aided further loan reduction in the June quarter and its outstanding net debt stood at Rs 79 crore at June-end.
While the prices continue to remain firm in the central region, cement demand appears to be moderating in the past few months. The management believes that the government's commitment to infrastructure projects should support demand over the next few quarters. The company has, therefore, increased focus on retail market to offset the weakening demand from other segments.
Heidelberg Cement is focusing on premiumisation and also weighing options to expand into newer markets through the inorganic route. Mycem Power, Heidelberg’s premium product offering, witnessed a strong offtake during April-June as volumes registered a jump of 53 percent YoY.
Outlook and recommendation
The cement sector has witnessed a healthy double-digit growth in the past 12-18 months owing to the government’s thrust on infrastructure and housing projects. The return of an incumbent government with an enhanced majority augurs well for the cement sector due to the continuation of economic policies. The management of Heidelberg expects the demand momentum to continue and anticipates a volume growth of 6-7 percent in 2019.
Heidelberg (CMP: Rs 188; Market cap: Rs 4,386 crore) has been our top pick from the midcap cement pack and the scrip has risen by more than 20 percent this year, making it one of the best-performing companies in the domestic equities market. Given the outperformance, smart investors should look to book profit as our investment thesis has played out and the company now trades at valuations of nearly 9 times FY20 estimated Enterprise Value/EBITDA, which appears expensive considering the volume constraints and tepid demand environment.
The company has a healthy margin profile, high returns and impressive cash generation, which together contribute to its solid business fundamentals. Long-term investors should, therefore, wait for an opportune time to include this quality business in their core investment portfolio at a discounted price.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more. First Published on Aug 1, 2019 11:00 am