Prefer midcap cement companies over largecaps: Centrum

According to Singh, the stocks of both the companies are currently trading high valuations. "I expect that to correct going ahead," he says. Singh bets on midcap cement companies than the large cap ones.

Below is the edited transcript of Singh’s interview with CNBC-TV18. Also watch the accompanying video.

Q: What are your expectations from ACC and Ambuja?

A: We are expecting quite good set of numbers from ACC and Ambuja on year on year basis. For ACC we are expecting the profits to grow by around 31% year on year and Rs 2.29 billion. For Ambuja we are expecting the profits to grow by around 47% year on year to Rs 3.17 billion. In terms of volume and realizations, we are expecting around 15-16% realization growth from both these companies. ACC will show around 5% volume growth.

So, on the back of volume and realizations growth, ACC should show around 21% revenue growth and EBITDA should grow by around 8% year on year. We are expecting EBITDA margin expansion of around 4.5% points for ACC to around 15.6%. EBITDA per tonne should grow by around Rs 230-240 per tonne on year on year basis to Rs 623 per tonne.

For Ambuja we are expecting the volume growth to be around 10% year or year. Realization growth will be around 16% year on year, so that would lead to a revenue growth of around 28%. We are expecting EBITDA growth of 64% for the company and EBITDA margin expansion of around 5% point to 22.6%.

Q: What kind of EPS growth you are expecting for FY12 and 13 and how valuations stack up? Do they make it a buy or do they make it a hold or a sell?

A: FY12 we would see certain EPS growth of around 10-15% for these stocks. But my view is that in FY13, we would see a flat kind of an EPS. Operating margins should also be flat for these two companies, for ACC it should be around 20% or so, for Ambuja will be in the range of around 21-22%. Our view is that these stocks have run up in the last couple of days on the back of realization growth, which we have seen in the industry.

Industry is factoring realization growth of around 14-15%, which had been the case in Q2 and in this quarter also we will see realization growth. But going forward, the realization growth will be flattened. These companies should show a realization growth of around 3-4% on a sequential basis in next quarter and from there it would be flat. So, factoring all these things, the valuations for these companies are stretched at current levels because these companies are trading at around 10-12 times PV/EBITDA multiple on FY13 valuation. We should see some correction going forward.

Q: Did you see any of the smaller cement companies such as Mangalam Cement which came out with a good set of numbers or JK Lakshmi despite the buyback it has been rising quite a bit? Any views on the broader market cement companies?

A: We track five-six midcap companies. We track India Cement, Orient Paper, JK Cement. On basis of realization growth and volume growth, these companies are able to show good set of numbers in this quarter.

For example, India Cements’ EPS was in the range of Rs 2 FY11, but on the back of realization growth in FY12 it should be able to report EPS of around Rs 11.50. We are expecting to see a significant jump in EPS in FY12. Going forward, all these companies will show some stable numbers in FY13 because realization growth will be muted and costs are increasing.

Q: From the broader markets what are your top picks?

A: We continue to like midcaps. We have a buy on India Cement, Orient Paper and JK Cement. We have a sell on all largecaps.

Q: How do you expect FY13 to pan out in terms of realizations? The demand as well as realization was unexpectedly better than expected in the past quarter. What’s the estimate for FY13 and even for this quarter?

A: In this quarter, what has happened is that in January we have seen that the large players which have come out with their dispatches data, their utilization rate seems to be in the range of around 89-91%. If we go by this data, then the industry should show an absolute dispatch number of around 20.5 million tonne.

Growth in January should be around 10-11% on a year on year basis. However, our channel checks with dealers reveal that dispatches have not improved on the ground level. In FY13 we will see a dispatch growth of around 8-9%. Realization growth for the sector should be around 4-5% against 8-9% in FY12.