Cement Sector Thematic: Quality Mid-caps – Ready to Soar--Karvy report. read here.....We are positive on three superior mid-cap cement stocks – JK Cement, JK Lakshmi Cement & Madras Cements – and initiate coverage with “BUY” recommendation. Our conviction is fundamentally based on four factors. Firstly, these stocks are likely to deliver industry leading volume growths by dint of their recent/on-going expansions, which would also diversify the companies’ regional sales presence. Secondly, the operational efficiency of these companies should benefit driven by lower fuel costs and self sufficiency on captive power front. Thirdly, the net debt/equity ratio of these companies should peak-out in FY14-15E at below 1x, as the major chunk of the capex would be funded from internal accruals. Fourthly, the profitability of these companies is expected to grow at higher CAGR in FY12-15E compared to FY09-12. Pre-elections demand analysis paints optimism; Capacity expansion rate is slowing down: Our analysis of the pre-elections cement demand across 11 states suggests demand in FY14-15E should be higher than 6% of FY13E as eight major state elections (~50% of total cement demand in India) and the General Election are lined up during FY14-15E. Hence, we factor in ~8% demand CAGR during FY13-16E period. This along-with a moderation in capacity expansion at 7% CAGR should help industry utilization to recover by ~300bps during FY14-16E to 77% by FY16E. Multiple triggers: Despite lower industry utilization, some of the factors that could have positive fall-out for quality cement stocks are § The industry’s capacity expansions during FY12-15E is largely debt driven (implies low probability of aggressive price wars despite weak industry utilization) and by either a new entrant or an existing player in new region (implies elongated period in enhancing distribution and supply). § Moderating Fuel costs – one of the key variable inputs - have moderated thereby helping the manufacturers’ operational efficiencies. § Decline in Plant-level Inventories of Cement & Clinker: The industry has pruned plant-level inventories for cement and clinker by >20% in last 2-3 years, which augurs well for the sector in terms of less likelihood of sharp price correction during unexpected contraction in demand. Cement has a lower shelf life of 2-3 months; hence any surge in unsold inventory creates sharp pressure on the prices. Companies Covered 1. JK Cement (JKCE IN; BUY; Mkt Cap: US$290mn; CMP: Rs236; TP: Rs350; 49% Upside) – White Cement Brightens Profitability 2. JK Lakshmi Cement (JKLC IN; BUY; Mkt Cap: US$215mn; CMP: Rs107; TP: Rs180; 68% Upside) – On Strong Footing 3. Madras Cements (MC IN; BUY; Mkt Cap: US$967mn; CMP: Rs234; TP: Rs300; 28% Upside) – Shining Southern Star
Posted on: Mon, 17 Jun 2013 22:57:51 +0000
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