January 18, 2013 / 17:23 IST
Motilal Oswal has come out with its report on cement sector. According to the research firm, the profitability of Mid Cap Cement Universe is expected to improve by INR154/80 per ton in FY14/FY15 to INR1,033/INR1,113 per ton. Motilal recommends to buy Birla Corporation (BCORP), Dalmia Bharat (DBEL), J. K. Cement (JKCE), JK Lakshmi Cement (JKLC), Orient Paper and Industries (OPI), Madras Cements (MC), and India Cements (ICEM) and Neutral on Century Textiles and Industries and Prism Cement (PRSC).
"Cement sector: Our view on the Cement sector remains positive, driven by expected pick-up in demand and slowing capacity addition, thereby driving utilization, pricing and profitability. Mid Cap Cement stocks are trading at very attractive earnings valuations and significant discount to replacement cost and large peers. As the operating performance improves, the Mid Caps should see a re-rating. Pick-up in M&A activity is another potential re-rating trigger. Mid Caps offer base case upside of over 50%. We initiate coverage on seven Mid Cap Cement stocks. Buy BCORP, DBEL, JKCE, JKLC, OPI, MC and ICEM; Neutral on CENT and PRSC.Our view on the Cement sector remains positive. Short-term volatility notwithstanding, we expect sustained volume recovery (~9% CAGR over FY13-15), slowing capacity addition and higher opex/capex cost to result in strong pricing (INR15/ INR12/bag increase in FY14/FY15). This coupled with cost stabilization, albeit at higher levels, will drive profitability improvement and capital efficiencies. We expect the outperformance to continue (after 38% outperformance in CY12), driven by volume growth recovery, stabilizing cost and improving profitability.We expect the profitability of our Mid Cap Cement Universe to improve by INR154/80 per ton in FY14/FY15 to INR1,033/INR1,113 per ton. We estimate EPS growth of ~42% CAGR (FY13-15E) for MOSL Mid Cap Universe, translating into ~550bp RoE improvement as against ~180bp RoE improvement for the Large Caps. Narrowing of the operating performance gap will drive re-rating.Our Mid Cap Cement Universe is currently trading at very attractive valuations of ~4.7x/3.9x FY14/FY15 EV/EBITDA and ~USD69/USD64 EV/Ton (FY14/FY15), considering improvement in operating performance and superior earnings growth. We believe the Mid Caps offer better risk-reward and initiate coverage on seven Mid Cap Cement stocks. We recommend Buy on BCORP, DBEL, JKCE, JKLC, OPI, MC, and ICEM and Neutral on CENT and PRSC. While base case return is over 50% (based on FY15 estimates), bull case returns could be 2-4x (see our Blue Sky Scenario). Cement upcycle, improvement in operating performance for Mid Caps, balance sheet deleveraging and increase in industry consolidation driven by M&A activity would be catalysts for re-rating," says Motilal Oswal research eport.FIIs holding more than 30% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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