Buy Deccan Cements; target of Rs 1290: Centrum

We interacted with Deccan Cement’s (DCL) management at its 36th AGM in Hyderabad. We also interacted with various cement dealers and marketing executives in AP/Telangana (AP/T) region during our road trip. DCL management is focussed on improving their current utilisation (59% in FY16), increase plant efficiencies (railway siding commissioning by Q3FY17), and has no capacity expansion plan for next two years (owing to its low utilisation). Our lateral interactions during the AP/T road trip suggest slow but steady cement demand recovery. The laterals also suggested that supply discipline has led to 35% increase in cement price over last one month in AP/T and this is expected to sustain.  We expect the full impact of strong price hike to be visible in DCL’s H2FY17 profitability (50% sales in AP/T) and hence we upgrade DCL’s profit estimates, leading to its 22%/47% EBITDA/PAT CAGR.  Reiterate BUY with a revised TP of Rs 1,290.

We reiterate our BUY on DCL, with a higher TP of Rs 1,290 valuing it at 4.5x its FY18E EBITDA  (earlier Rs 1180 at 4.5x FY18E EBITDA). Given that DCL’s current return ratios are among the best in the industry and are sustainable owing to improving demand/pricing outlook in south, our fair value multiple of 4.5x EV/EBITDA can get re-rated. At our TP, the stock would trade at an EV of USD52/MT. DCL currently trades at attractive valuations of 4.5x/3.2x its FY17/18E EBITDA and at adjusted-OCF/EV yield of 15%/21% on its FY17/18E cash flow. Key downside risks: Lower than expected cement demand, disruption in supply discipline, spike-up in energy and freight costs.For all recommendations, click here 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.