Heidelberg Cement Recovers In March 2012 Quarter Sequentially

Heidelberg Cement India Ltd, a subsidiary company of Heidelberg Cements which is one of the leading cement producers in the world, witnessed decent recovery in the March 2012 quarter on a QoQ basis. The net sales of the company during the quarter grew by 10.4 per cent QoQ to Rs 287.69 crore and the net profit for the quarter stood at Rs 11.43 crore against a loss of Rs 1.8 crore in the December 2011 quarter. There has been strong recovery in the March quarter in terms of demand, especially in the northern region. The recovery is reflected from the jump in sales volume (dispatches) and rise in the realisation during the quarter. The cement dispatches during the quarter grew by 7.1 per cent on a QoQ basis to 0.784 million tonnes and the cement realisation improved by 3.1 per cent to Rs 3,551 per tonne.

On the operating side, despite a jump in the raw material cost (up by 48 per cent QoQ) and power & fuel expenses (up by 26 per cent QoQ), the operating profit grew by 308 per cent on a QoQ basis to Rs 26.62 crore Moreover, the operating margin improved by 700 basis points on a QoQ basis to 9.25 per cent.

However, on a YoY basis the performance remains subdued for the March quarter. The net sales during the quarter grew by 3 per cent on a YoY basis while the net profit declined by 56 per cent on a YoY basis and operating profit of the company declined by 43.74 per cent to Rs 26.62 crore. This was mainly on account of the high base effect in the same period a year ago. Last year the demand situation was better as compared to the fiscal year 2012.

If we look at the first nine months of the fiscal year the situation was pretty challenging for the cement companies. High raw material prices, high power & fuel cost, muted demand due to slowdown in the infrastructure and construction activity made a painful impact on the cement companies. However, with the RBI easing the liquidity situation in December 2011 there was some revival in demand in the March quarter 2012.

As for the outlook, we believe that with the onset of monsoon in the coming quarter we may see a slowdown in demand due to a slower pace of infrastructure and construction activity – this being more of a cyclical scenario. And with the slowdown in demand the prices consequently will correct by an average Rs 10-15 on a per 50 kg bag. However, this time the high freight cost will hurt the margins of the company as with a slowdown in demand the cement companies would not be able to pass on the hike to the consumers.

Going ahead, we believe that the fiscal year 2013 will see much better demand growth as compared to FY2012 mainly on the back of higher infrastructure spending by the government and due to the election period scheduled in some parts of the country.  In FY12 the industry dispatch grew by 6.9 per cent and it is expected to further grow by 8-9 per cent in FY13. Moving on to the growth plans, the company is in the process of cold-commissioning a 3 MTPA cement plant by June 2012 to take its total capacity to 6 MTPA. This will start contributing to the company’s revenues from H2CY12 onwards.

At its CMP of Rs 29 it is now trading at a PE of 22x with its CY11 EPS of Rs 1.29. The higher PE is on the back of the losses made in the last two quarters. However, if we look at the company from its EV per tonne perspective, it is available at Rs 2,078 which looks attractive as compared to the other smaller cement players. Also, given the kind of growth that we expect in the earnings from the new capacity as well the improving economic situation and a higher thrust on infrastructure spending this year, we recommend that investors should buy this scrip with an upside potential of 15-18 per cent over the next one year.