Cement sector: What is Elara Capital betting on?

4119 Investors following Orient Paper. Share this News with them.

0

Like this story, share it with millions of investors on M3

Cement sector: What is Elara Capital betting on?

Ravindra Deshpande, Research Analyst - Metals and Cement, Elara Capital is bullish on Orient Papers and JK Cement in the cement sector.

Post your opinion here

 

0

Tweet

Share on Tumblr

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS Cement space looks weak: Gupta Buy cement stocks at lower levels: Betadpur JK Cement reports Rs 525.67 crore turnover for quarter ended Jun 2010 Cement firms earnings lower as capacities kick in ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Ravindra Deshpande, Research Analyst - Metals and Cement, Elara Capital is bullish on Orient Papers and JK Cement in the cement sector.

"I would be more with JK Cement and Orient Paper because I have limited downside and risk-reward ratio, I feel, is much more favourable in these companies than the large-cap players at this point of time."

Here is a verbatim transcript of the exclusive interview with Ravindra Deshpande on CNBC-TV18. Also watch the accompanying video.

Q: Any in the pick of the pack that interested you that you thought is bearing or weathering the downturn a little better than the others?

A: It would be Orient Papers because although it is operating in southern markets, if we see the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) per tonne for Orient Paper, it is somewhere around Rs 887 per tonne, which is nearly Rs 900 per tonne. Orient Paper remains the cheapest cost producer of cement in India, its cost of production is nearly Rs 2,000 which is the cheapest in India right now. So despite its presence in southern market, we feel Orient Paper would weather the storm better than the others.

Q: For the industry as a whole, when do you see these oversupply issues easing off a bit for the cement industry?

A: We feel that over the next three years including FY11 i.e. 70 million tonne of capacity would be added and demand at the same time is growing at around 10.5% on a base of 200 million tonne. So demand is growing at around 22 million tonne per annum, so we feel by FY13 i.e. post FY12, these oversupply issues will start to ease out a bit.

Q: In the meanwhile, would you not touch any of the cement companies? Is there any other than Orient Paper which still holds your interest or is all the good and bad news in the price?

A: We like the undervalued mid-cap companies basically. If we see the valuation for companies like Orient Paper or JK Cement, they are trading at EV per tonne of USD 45 to 55 per tonne against the replacement cost of USD 100 per tonne. That is where even large-cap peers are trading at. So there is not much significant difference between these companies and the large-cap peers, except for the regional presence of large-cap companies.

So, I would be more with JK Cement and Orient Paper because I have limited downside and risk-reward ratio, I feel, is much more favourable in these companies than the large-cap players at this point of time.

Q: Where are the margins expected to improve, regionally ofcourse south has been the biggest laggard, but as the improvement happens which are the stocks that might first show or which are the regions that might first show an improvement?

A: I think it would be northern region. In terms of margin, we feel Orient Paper and JK Cement both have significant volume growth coming in which would probably help their margins. But we feel the margins for overall industry would be under pressure for FY11 as well as FY12.

Q: Do you have any specific view on Grasim and India Cement and their results this quarter?

A: No, we don't cover both these stocks at this point of time.