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Summary of Contents
STOCK IDEA
India Cements
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs315
Current market price: Rs220
Back in the reckoning
Key points
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Prime beneficiary of upturn in south: In
FY2006 cement consumption in the southern region grew by 25%. With
large infrastructure projects and manufacturing bases of MNCs
coming up in the region, consumption is expected to grow at a CAGR
of 11% for the next few years. Also fresh capacities here shall
come up only in H1FY2009. Hence cement prices are expected to
remain firm for the next two years. Thanks to its high leverage to
cement prices, India Cements Ltd (ICL) shall benefit the most from
this boom.
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More growth from capex plan: Encouraged
by the improvement in its financials and considering the scope for
more improvement, ICL plans to raise its capacity by 2 million
tonne by December 2007 at a cost of Rs350 crore. This shall take
its total capacity to 11 million tonne. The entire capex shall be
funded by the proceeds of a recent FCCB issue.
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Balance sheet transformed: With bouts of
capital infusion through various routes, viz private placement,
debt replacement and GDR issue, ICL's balance sheet has improved
in the past few years. Its debt/equity ratio has come down to a
much respectable 1.8:1 in FY2006 from 6:1 in FY2005. With a strong
free cash flow, we expect the ratio to drop further to 0.3:1 in
FY2008. The RoNW should also improve from 4.3% in FY2006 to 27.7%
in FY2008.
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Trading at a huge discount to peers: At
the current market price of Rs220, ICL is trading at 8.8x its
FY2008E earnings and 6.1x its EV/EBITDA. On an EV/tonne basis, it
is trading at USD109 per tonne of cement. That's a huge discount
of 30% to some of its peers who are trading at an average
valuation of USD150 per tonne of cement. In view of the steep
growth expected in its earnings and the improvement in its balance
sheet, the discount is not justified. We recommend a Buy on ICL
with a price target of Rs315.
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