Good entry point in cement sector: Motilal Oswal

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Good entry point in cement sector: Motilal Oswal

Motilal Oswal has come out with a report on cement sector.

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Ambuja Cements BSE | NSE 29/05/12 Are Mutual Funds betting on Ambuja Cements? Other Stocks in this news Jaiprakash Associates | Grasim Industries | Birla Corporation | India Cements | ACC | UltraTech Cement | Shree Cements |

Motilal Oswal has come out with a report on cement sector.

Good entry point in cement sector:

The worst is behind and we expect gradual improvement in operating performance, though volatility would remain high. This coupled with long-term demand drivers and current valuations makes a compelling Buy case.

Trough behind us...: We believe that we have already witnessed bottom-of-the-cycle utilization, and expected gradual improvement driven by of sustainable demand drivers.

...but volatility to prevail: Although the sector would continue to be plagued by over-capacity at least till December 2011, cement prices are expected to remain buoyant at least till 2QFY12, driven by seasonality in demand. We expect high volatility in cement prices and cement companies performance over the next 6-9 months.

Good entry point: Presence of sustainable demand drivers and gradual recovery from the trough of 2HCY10 would make the foundation for the next upcycle. Valuations are attractive and offer a good entry point for the next upcycle, notwithstanding volatility in cement prices and operating performance.

Prefer Ambuja Cement , JP Associates and Grasim among large-caps, and Birla Corp and India Cement among mid-caps. 

Large-caps:

ACC : After three years of muted volume growth, ACC would witness robust volume growth of~10% CAGR over the next two years, driven by new capacities. Allotment of coal blocks in Madhya Pradesh (in JV with the state) and West Bengal (inconsortium) offers option value in the long term. Creeping acquisition by Holcim would provide support to the stock price. The stock is valued at 18.2x CY11E EPS,9.4x EV/EBITDA and US$121/ton (~30mtcapacity). Maintain Buy with a target price of Rs 1104 (~10x CY11E EV/EBITDA).

Ambuja Cements : The stock has corrected meaningfully, as its operating performance was under pressure in the last two years. However, with superior profitability being restored, we expect a re-rating. Creeping acquisition by Holcim would provide support to the stock price. The stock is valued at 13.5x CY11E EPS,and at an EV of 7.9x CY11E EBITDA and US$150/ton (~27m-ton capacity). Upgrade to Buy, with a target price of Rs 169 (~10x CY11EEV/EBITDA).

UltraTech Cement : The recent acquisition of Star Cement (UAE) would put pressure on operating performance in the short run. On going capex plans of Rs 102b over the next 3-4 years would restrict free cash flow generation. The stock is valued at 15.2x FY12E EPS,and an EV of 7.8x FY12E EBITDA and US$129/ton (~51m-ton capacity). Upgrade to Buy with a target price of Rs 1371 (~10xFY12E EV/EBITDA).

Grasim : Outlook for the VSF business has improved considerably. This coupled with improving short-term outlook for the cement business augurs well for Grasim. The stock quotes at attractive valuations of 8.1x FY12E consolidated EPS, 1.3x FY12EBV and at an EV of 4.5x FY12E EBITDA. Implied valuation of the cement business is US$86/ton. Maintain Buy, with a target price of Rs 3154 (SOTP based, valuing economic interest in business at 10x EV/EBITDA and 20% holdco discount, and VSF at 4x EV/EBITDA).

Jaiprakash Associates : The stock trades at 16.7x FY12E and 13.8xFY13E earnings. Our SOTP based target price is Rs 108,comprising the cement business at Rs 84/share (8x FY12E EV/EBIDTA), E&C division at Rs 31/share (6x FY12E EV/EBIT), power business at Rs 27/share (DCF), real estate at Rs 33/share (NAV) and net debt of Rs 67/share. We maintain Buy, with an SOTP-based target price of Rs 108.

Mid- caps:

Birla Corp : Birla Corp is an efficient cement manufacturer, with above average operating matrices. It has very strong balance sheet, with net cash of Rs 84/share in FY11 (~27% of market cap). The stock is valued at 4.8x FY12E EPS, and at an EV of 2.7x FY12E EBITDA and US$52/ton (~7.5m-ton capacity). Maintain Buy, with a target price of Rs 452 (~4x FY12E EV/EBITDA).

India Cements : We believe the worst is over for the Indian cement industry, especially for the southern region, with slow down in capacity addition. With very high operating leverage and relatively high gearing, India Cement would be one of the biggest beneficiaries of an improvement in cement prices in South India. Possible break down of the cartel would be our biggest concern. The stock is valued at 11.8x FY12E EPS, an EV/EBITDA of 7.1x and US$79/ton (~15.5mt on capacity). Maintain Buy, with a target price of Rs 117 (~8x FY12E EV/EBITDA).

Shree Cements : Shree Cement's volume growth is likely to slow down to the industry average over FY11-13. This coupled with erosion in its superior profitability due to higher energy cost would impact valuations. Further, it would be susceptible to declining merchant power tariffs coupled with higher cost of generation, resulting in pressure on merchant power profitability. The stock is valued at an EV of 5.4x FY12EEBITDA and US$87/ton (adjusting for power business). Maintain Neutral, with an SOTP based target price of Rs 2166.

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To read the full report click on the attachment