HeidelbergCement India Limited — Q3 FY23 earnings call

Call held 15 Feb 2023

Management summary

HeidelbergCement India reported a challenging Q3 FY23 with volumes impacted by warehousing issues and profitability hit by a 9% increase in costs, primarily power and fuel. Despite these headwinds, the company maintained a strong focus on green power, increasing its share by 33%, and continued to operate with negative working capital. Management outlined plans for debottlenecking, limestone mine expansion, and expects demand improvement in Central India, alongside a softening of fuel prices in the upcoming quarter.

Highlights

  • Green power share increased by 33% QoQ.

  • Volumes increased QoQ but decreased YoY due to warehousing issues.

  • Cost increased by about 9% YoY, partially offset by price increases.

  • EBITDA dropped due to increased power and fuel costs.

  • Company continues to operate on negative working capital with net cash of about ₹1.4-1.5 billion.

  • Fuel cost per ton of cement for Q3 FY23 was ₹1,260, up from ₹980 in Q3 FY22.

  • Fuel cost increased by ₹300/ton and total cost by ₹370/ton for the quarter.

  • Realization declined by 2.5% QoQ in December quarter.

Key financials

5 periods

Headline

  • Green Power Increase
    33%
  • Cost Increase
    9%
    YoY +9%
  • Net Cash
    1.4 Bn
  • Current Clinker Capacity
    3.1 million ton
  • Total Clinker Capacity (incl. Karnataka)
    3.5 million ton
  • Petcoke Price (Landed)
    ₹20,000/ton
  • Central India Capacity Utilization (Current)
    73%

Q2 FY23

  • Trade Share
    83%

Q3 FY22

  • Fuel Cost per Ton
    ₹980

Q3 FY23

  • Fuel Cost per Ton
    ₹1,260
  • Fuel Cost Increase
    ₹300
  • Total Cost Increase
    ₹370
  • Realization Decline
    2.5%
    QoQ -2.5%
  • Trade Share
    76%
  • Kcal Cost
    ₹2.85
  • Lead Distance
    350 km

9M FY23

  • Fuel Cost Increase
    40%
    YoY +40%
  • Volume Drop
    9.5%
    YoY -9.5%

What they filed

Q1 FY27: revenue up 5.0%, net profit down 35.4% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue461 543 612 598 512 +11%574 +6%646 +6%628 +5%
EBITDA37 33 91 89 58 +57%53 +61%88 −3%67 −25%
Net profit11 5 50 48 25 +127%16 +220%45 −10%31 −35%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Cost

  • Gigajoule consumption Cost · future · High confidence 3.06-3.07
    So, we should be able to do lower gigajoule close to about 3.07, 3.06 and in the power also close to about 70 units.

    — Mr. Jamshed Naval Cooper – Managing Director

  • Power consumption Cost · future · High confidence 70 units

    — Mr. Jamshed Naval Cooper – Managing Director

Capacity

  • Additional Clinker Capacity (Debottlenecking) Capacity · next year (FY24) · High confidence 200,000-250,000 tons
    In terms of 250,000, 200,000 tons of clinker should be additionally available to us. ... So, next year we should be able to bring this on stream.

    — Management

  • Additional Cement Capacity (from Debottlenecking) Capacity · FY25 · High confidence 350,000 tons
    This 2,00,000 tons of clinker will result into close to about 3.5 lakh tons of cement.

    — Management

Merger

  • Heidelberg & Zuari Merger Timeline Merger · next 1.5 years · Medium confidence 1.5 years
    It might take another year and half or so. I would say on a safe side I am telling you on a year and half.

    — Management

Fuel Cost

  • Fuel Cost Reduction QoQ Fuel Cost · Q4 FY23 · Medium confidence 8%
    Quarter-on-quarter you think it could go down by 10% average? Management: 8% you take it on a safe side.

    — Management

Demand Growth

  • Central Region Demand Growth Demand Growth · FY24 · Medium confidence 7%
    Our expectation for 24 is about 7%.

    — Management

  • Central Region Demand Growth Demand Growth · FY23 · Medium confidence 5.5-6%
    FY23 just let me check it should be about 5.5%, 6%.

    — Management

Capex

  • Sustainable Capex Capex · FY23 & FY24 · High confidence 40 crores
    Generally, we keep the CAPEX divided into two parts. One is the sustainable CAPEX and that is around Rs. 40 crore for this Fiscal year as well as the next Fiscal year

    — Management

  • Debottlenecking Capex Capex · next FY (FY24) · High confidence 15 crores
    on top of that next year there will be around Rs. 15 crore CAPEX on account of this clinker debottlenecking.

    — Management

  • Total Capex Capex · next FY (FY24) · High confidence 55 crores
    So, we can consider that next year this CAPEX will be around Rs. 55 crore for the Fiscal year including AFR.

    — Management

Revenue

  • Top Line Compounding Growth Revenue · next 3-5 years · Medium confidence more than 10%
    We are pretty much hopeful that and pretty convinced that next 3 to 5 years the top line should increase more than 10% compounding growth.

    — Management

Risks & concerns

  • Warehousing and logistics issues

    medium

    Some warehousing problems and changes impacted volumes in Q3 FY23, but management believes it's temporary and being overcome.

    Management acknowledged

  • Competitive pricing pressure

    medium

    Increased capacities and aggressive pricing by competitors have impacted volumes and realizations, particularly in Central India.

    Management acknowledged

  • Fuel cost volatility

    medium

    Power and fuel costs significantly impacted EBITDA, though softening trends are expected in the March quarter.

    Management acknowledged

  • Statutory clearances for projects

    medium

    Greenfield projects and capacity expansions are subject to long and complex statutory clearance processes, which are not entirely within management's control.

    Management acknowledged

  • Regional oversupply in Central India

    medium

    Capacity in Central India is projected to increase significantly (65 to 90 million tons by 2024-2025) while demand growth is lower (7%), potentially leading to persistent pricing pressure.

    Analyst acknowledged

Areas of evasion (1)

  • Zuari Cement specific projects (refused to comment on HCIL call)

Q&A highlights

3 direct
Volume decline and premium share accounting Direct
Let me answer your question in the reverse order in terms of our premium there was an accounting change, we had introduced this new brand and there was some method of computing which we were doing so that is not actually 57 now this is a true picture which is on the total trade volume.

Clarified a significant reported decline in premium share was due to an accounting change, not actual performance, and addressed reasons for volume decline.

Asked by Shravan Shah

Viability of Calcined Clay (LC3) Cement Direct
The quality of cement is a little different from the normal cement. So, you can use those type of cement for masonry cements, but if you start casting concrete and things like that then you may have a problem there. I would say very simple at the moment we may make hundreds of products abroad, but the literacy level has to be equally scaled up because you use a wrong product at the wrong place then you will only blame the company that and the person do not know to read and write the masons the user community is very I would say not educated or they do not take care of those things, responsible behavior on the field is very lacking.

Provided a detailed, nuanced explanation of the challenges and suitability of LC3 cement in the Indian market, highlighting practical and social factors.

Asked by Ritesh Shah

Heidelberg and Zuari merger timeline Direct
Ritesh as I mentioned I will repeat the same thing there is nothing new which has happened in this, but yes the group is working on this to merge these two units it is a question of time. So, we will merge these two units under one entity so that we have the financial fungibility which makes sense for us rather than running to you, but that will happen. It might take another year and half or so. I would say on a safe side I am telling you on a year and half.

Gave a specific, albeit approximate, timeline for a significant corporate restructuring, which is crucial for long-term investors.

Asked by Ritesh Shah

2 min read 6 chapters

Detailed narrative

Q3 FY23 Performance Overview

HeidelbergCement India experienced a mixed Q3 FY23. Volumes saw a quarter-on-quarter increase but a year-on-year decrease, primarily attributed to temporary warehousing issues. Costs rose by approximately 9% YoY, largely due to increased power and fuel expenses, which significantly impacted EBITDA. Despite these challenges, the company maintained a negative working capital position and reported net cash of around ₹1.4-1.5 billion.

Cost and Realization Dynamics

Fuel cost per ton of cement for Q3 FY23 was ₹1,260, a notable increase from ₹980 in Q3 FY22. For the quarter, fuel costs increased by ₹300/ton, contributing to a total cost increase of ₹370/ton. Over the nine months ended December 2022, fuel costs rose by 40% YoY. Realization declined by 2.5% QoQ in the December quarter, reflecting competitive pricing pressures and a 9.5% volume drop over the nine-month period.

Green Initiatives and Operational Efficiency

The company reported a substantial 33% increase in green power utilization, highlighting its commitment to sustainability. Management aims to further reduce gigajoule consumption to 3.06-3.07 and power consumption to around 70 units. These efforts are part of a 'mission possible' program focused on embedding permanent efficiency improvements across plants, building on best demonstrated practices.

Capacity Expansion and Limestone Reserves

HeidelbergCement India plans to debottleneck its Central India plant, aiming to add 200,000-250,000 tons of clinker capacity, which will translate to approximately 350,000 tons of cement capacity, expected to come on stream next year (FY24). The company also successfully bid for adjoining limestone mines in Madhya Pradesh, securing reserves that will extend the plant's life and offer future expansion opportunities for a 3 million ton greenfield project in Gujarat, though this is a long-term plan (3.5-4 years).

Market Outlook and Demand

Management projects Central India demand growth of 7% for FY24 and 5.5-6% for FY23. They anticipate a softening of fuel prices in the March quarter, with a potential 8% QoQ reduction. The overall outlook for India's cement demand remains positive, driven by government infrastructure projects and a good Rabi crop expected to boost rural demand. However, regional oversupply in Central India, with capacity projected to reach 90 million tons by 2024-2025, poses a risk to pricing.

Strategic and Corporate Developments

The Managing Director announced his resignation effective March 31, 2023, with Mr. Joydeep Mukherjee taking over. The potential merger of HeidelbergCement India and Zuari Cement into a single entity is expected to take another 1.5 years. The company's CAPEX for FY23 and FY24 is budgeted at ₹40 crore for sustainable projects, with an additional ₹15 crore for clinker debottlenecking in FY24, totaling ₹55 crore. The withdrawal of GST incentives post-February is expected to impact margins by approximately ₹40 per ton.

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