See limited downside in Andhra Cement: A Chugh

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See limited downside in Andhra Cement: A Chugh

Ashish Chugh, Investment Analyst & Author Of Hidden Gems is of the view that there is a limited downside in Andhra Cement.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See previous views by Ashish Chugh See what other Experts & Brokerages are saying about Andhra Cemen See messages about Andhra Cemen Andhra Cemen BSE | NSE 01/06/12 Are Mutual Funds betting on Andhra Cemen?

Ashish Chugh , Investment Analyst & Author Of Hidden Gems is of the view that there is a limited downside in Andhra Cement .

Chugh told CNBC-TV18, "Andhra Cement is a company belonging to the GP Goenka group and this company has two cement plants with a combined capacity of 1.4 million tonne per annum. If one looks at the financials of the company FY09 sales were about Rs 370 crore, Profit after Tax (PAT) was Rs 38 crore which means an EPS of about Rs 4. At the current price of Rs 26-27, the stock trades at a price to earning ratio of 7 and a market cap of Rs 350 crore which is in line with the companies in the peer group."

He further added, "The reason we like this stocks that is we believe this stock could be a possible sell off candidate, if that were to happen the valuation it can fetch could be significantly higher than its current enterprise value. We have done a calculation taking a base case scenario of say a valuation of USD 100 per tonne, which would give it an enterprise value of about Rs 1,700 crore and after reducing debt of about Rs 500 crore give an equity valuation of Rs 1,200 crore which is close to Rs 90 per share. Taking optimistic scenario of about USD 200 per tonne valuation- will give it an enterprise value of Rs 3,400 crore and an equity valuation of Rs 2,900 crore, which leads to a per share valuation of about Rs 210."

"The mention acquisitions which have happened in the last few years, Mysore Cements got acquired by Heidelberg at valuation of about USD 117 per tonne. Shree Digvijay Cement got acquired by CIMPOR at USD 162 per tonne, Ambuja Cement was taken over by Holcim at USD 200 per tonne and the latest acquisition in the cement space has been private company called My Home and Industries which is a Hyderabad based company which happened at about USD 235 per tonne. So even if we take a base case scenario of USD 100 per tonne which is probably the worst case scenario, the likely scenario in this case would be anywhere between USD 150-200 per tonne, which means significant upside in the stock value from these levels. "

"Another thing is if you see the disclosures to the stock exchange promoters have been continuously increasing their stake in the company through market purchases. Also one can see a lot of action as far as inter state transfer within the promoter group is concerned. Now all these things could be a precursor to a possible sale and it is a possible sale because management would always be in a denial mode till the sale happens. So you have a company which at the current price you are getting at the same valuation as the peer group. Company is expanding its capacity from 1.5 million tonne to 3.5 million tonne which was expected to go on stream in the month of June of 2009 and it has been delayed by about 5-6 months and it is now expected to go on stream between November and December of this year. So even if the sale were not to materialize, you are not over paying for the stock because you are buying the stock at a price to earning ratio of 7, and market cap of about Rs 350 crore."

"Moreover when the expanded capacity goes on stream, this will lead to higher revenues and higher profitability for the company, so the downside from levels looks restricted. But in the even of the sale of the company materializing you have significant upside form the current levels.
This is a stock to keep a watch on and not to buy on the upper circuit but to buy on bad days with the objective of holding the stock for 1-1.5 years."

Disclosure:  I have investments in Andhra Cements.