Stock Idea - India Cements

Recommendation: Buy

CMP = Rs 263 (as of Wednesday)

Price target: Rs 300

 

Key points

• With a revised capital expenditure (capex) plan of 14 million metric tonne (MMT) by the end of FY2009, India Cements will emerge as one of the top five cement players in India in terms of capacity. The company will witness a robust volume growth of 23% over FY2007-09. 
• South India is expected to witness a strong cement demand in the next couple of years due to heightened industrial activity and upcoming government projects.
• The company received the Madras High Court's approval for merger of Visaka Cements in Q1FY2008.
• For Q1FY2008, the combined turnover of the company stood at Rs 701 crore. The turnover was much in line with our expectations. Backed by higher realisations, the operating profit margin (OPM) improved by 400 basis points year on year (yoy) to 38%, whereas the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne stood at Rs1,150. Consequently, the profit before tax (PBT) stood higher at Rs 215 crore beating our expectation of Rs 200 crore for the same.
• In the last couple of months, the cement retail price has touched Rs 280 per bag in certain regions and the dealers expect it to touch Rs 300 per bag in the coming months. Considering the rise in prices, we are upgrading our estimates by 33.9% for FY2008 and 32.5% for FY2009.
• The company's strategy of augmenting its capacity through the brownfield route at a lower capital cost will enhance the company’s return on capital employed (RoCE) going forward. The Lower capital cost coupled with higher profitability will put the company's financials in an enviable position.
• Healthy financials, a leadership position in the South and a lower promoter stake make the company a potential target for acquisition. Whether the promoters will sell their stake is a question that time will answer but in case that happens we believe the acquirer will have to pay a hefty premium to the company as it will directly make them the market leader in the South.
• I expect the earnings of the company to grow at a compounded annual growth rate (CAGR) of 27% over FY2007-09 on an enhanced equity capital of Rs 260 crore.
• At the current market price of Rs 263, the stock is currently trading at 9.5x its FY2009E earnings per share (EPS) and at an enterprise value (EV)/EBITDA of 5.1x. Considering all these aspects, I maintain positive outlook on the stock with a revised price target of Rs 300.