Heidelberg Cement India: Quality business facing capacity constraints

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Heidelberg Cement India ended FY19 on a subdued note. The financial performance in Q4 was quite lacklustre in comparison to earlier quarters as volumes were impacted by capacity constraints. Top line and operational performance were largely stable as higher realisations, along with cost control measures, helped the company offset a contraction in sales volume.

Key result highlights

– The company reported sales growth of 2 percent and earnings before interest, tax, depreciation and amortisation (EBITDA) increase of 4 percent year-on-year (YoY). The demand in the central region continued to remain strong, but Heidelberg’s volumes fell 5 percent YoY as the company achieved its permitted operating limits in the three months to March.

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– Cost benefits from its recently set-up Waste Heat Recovery System plant and change in fuel mix offset the increased cost pressures and resulted in a mild increase in operating profit at Rs 125 crore in Q4 FY19.

– Despite the increase in raw material costs and power and fuel expenses, Heidelberg has sustained profitability metrics on the back of firm realisations (up 2 percent QoQ and 7 percent YoY) and cost control initiatives. The company improved its EBITDA per tonne to Rs 1,032 in January-March, which is significantly higher than the same quarter last year.

– Q4 capacity utilisation was near 90 percent for the grinding units and stood in-line with previous quarters. For the full year, the capacity utilisation touched 91 percent on the back of strong demand from infrastructure and housing segments. Given the current capacity utilisation levels, Heidelberg plans to expand its capacity by 0.4-0.5 million tonnes through a debottlenecking exercise in a phased manner.

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– During the year, the company repaid Rs 150 crore of external commercial borrowings and reduced its net debt to Rs 266 crore at the end of March 2019. Further, the receipt of Rs 69 crore interest-free loan from the UP government should help reduce its interest expenses.

– Heidelberg Cement is focusing on premiumisation and also weighing options to expand into newer markets through inorganic route. For FY19, the premium product volumes increased 19 percent YoY.

Outlook and recommendation

– The cement sector has witnessed a healthy double-digit growth in the past 12-18 months on the back of large-scale infrastructure development activity. The return of an incumbent government with an enhanced majority should aid demand for the cement sector with continuation of economic policies.

– Heidelberg expects the demand momentum to continue and anticipates a volume growth of 6-7 percent in 2019. Given strong business fundamentals, Heidelberg  has been our top pick from the midcap cement pack in the recent past, but the recent run-up in stock price (40 percent rally in the past 3 months) coupled with limited growth prospects make us change our stance on the stock from overweight to underweight.

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In terms of valuations, the company trades at a valuation of nearly 10 times FY20 estimated enterprise value/EBITDA, which appear expensive, considering the capacity constraints, and offers limited scope for upside from the current levels.

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