Broker bullish on Chettinad Cement, target of Rs 275

Broking house, Fortis Securities is bullish on Chettinad Cement , CCL. It has initiated coverage on the company with an 'outperformer' rating with a target price of Rs 275.

The report lists out some investment positives, these are below: -

Expansion of grinding capacity by 0.5 million MT would add to volume growth

"CCL is coming up with additional grinding capacity of 0.5 million MT at a cost of Rs 450 million financed through internal accruals. This is scheduled to be commissioned by March 06. We expect this additional capacity would result in volume growth at CAGR of 11.9%, over FY2005-07."

Strategically located plants in the South

"The plants of CCL are strategically located on the Tamil Nadu - Kerala border. The plants are located close to limestone mines and provide an easy access to the markets of Tamil Nadu and Kerala. The average price per bag of cement in Kerala is Rs 175 and in Tamil Nadu is Rs 145. Realizations in Kerala is among the highest in the southern region."

Captive power plant of 15 MW in Karikkali to bring down power cost

"The company has commissioned a 15 MW captive power plant in October 04 at Karikkali. The coal based captive power plant is expected to bring down per unit power and fuel cost by a rupee and this will add Rs 130 million annually to the bottomline. The power cost has come down to 27% of net sales in Q1FY06 as compared to 41% in Q3FY05. The Company is also planning to set up a power plant of 15 MW at Puliyur by FY08."

EBITDA to grow faster than revenues

"We expect EBITDA to grow at a CAGR of 21.1% over FY05-07. Our growth projections are based on the expected rise in cement prices and a fall in the per-MT power and fuel cost due to commissioning of captive power plant."

However, the report also pointed out some concerns, these are below: -

Inflationary coal prices could hinder bottomline

"As of now the company imports all its coal requirements, as Coal India, CIL has not yet given coal linkages to the company. The average rate for coal was up by 25% in FY05 at Rs 3674 per tonne compared to Rs 2935 per tonne for FY04. Any further rise in the coal prices could adversely impact the profitabillity of the company."

Freight Cost

"Cement is a high volume, low value product, where transport forms a major cost, both on raw materials, as well as finished goods. Most of the costs, concerning transport, are governed by government policies. Any further increase in fuel cost will affect the profitability of the company. For FY05 company transported 70% of its produce through road and 30% by rail."

Any increase in capacity in southern region could restrict the price growth

"The southern region is basically a supply surplus region so any addition to the existing capacity will widen the gap between demand and supply and could restrict price growth as expected by us."

About the company's valuations, the report says, "At the current price of Rs 178 per share, the stock is trading at a P/E of 13.3x FY06E and 7.8x FY07E and EV/EBITDA of 7.7x FY06E and 5.6x FY07E. Based on EV/Sales and EV/ton the company is valued at 1.9x FY06E and 1.6x FY07E and USD 80 FY06E and USD 64 FY07E. We initiate coverage on the stock with an Outperformer rating."

About the company's itself, the report says

"Chettinad Cement Corporation was founded by Dr. Rajah Sir M.A. Muthiah Chettiar in 1962. It has two plants with an installed capacity of 1.8 million MT. The company's manufacturing units are located at Puliyur, Karur and Karikkali Village in Tamil Nadu. CCL plants are in close proximity to Kerala and Tamil Nadu market. It ranks third in Tamil Nadu with a market share of 12% whereas in Kerala it has a market share of 9%."

"Chettinad Cement started its first manufacturing facility with a 0.2 million MT capacity at Karur in April 68 and came up with another greenfield plant at Karikkali Village in Tamil Nadu in October 01. Today with a combined annual production of 2.2 million MT, Chettinad is the third largest cement player in Tamil Nadu. The company has got a capacity of 17 MW of Wind Power generators near Poolavadi, Coimbatore. In October 04, the company commissioned a 15 MW captive power plant at Karikkali. It is also setting up a 0.5 million MT grinding capacity unit by March 06. CCL has decided to discontinue the production and sell of RMC business because the demand for RMC in that region has not been growing as per the expectation of the company."