Buy India Cement; target of Rs 175: ICICI Direct

The recent demonetisation is expected to keep cement demand subdued in the near term. However, we expect a sharp rise in tendering activity in Andhra Pradesh, Telangana to drive cement demand in the medium term. In addition, with higher volume push to non-southern region (like Maharashtra), increase in demand from individual house builders and housing scheme for poor in Tamil Nadu, we expect volume growth to improve (albeit at the cost of realisation) over the medium term. Considering this, we expect revenues to grow at a CAGR of 6.1% in FY16-18E.

In the near term, we expect cement demand to slow down due to demonetisation impact. We expect demand to revive from FY17E onwards led by higher infra spend by the Andhra Pradesh (AP) and Telangana governments, increase in demand from individual house builders and housing scheme for poor in Tamil Nadu. Further, we expect cost rationalisation led by better fuel mix, installation of power plant in AP and improving efficiency of plants to drive margins. In addition, with improving cash flow, we expect debt to reduce over the next two years. Hence, we remain positive on the stock from a long term perspective. Further, the recent fall in the stock price has made valuations even more attractive (i.e. EV/tonne of US$66/tonne, which is far below the current replacement cost of US$150/tonne). Hence, we maintain our BUY rating on the stock with a revised target price of Rs 175 (i.e. EV/EBITDA of 9.0x, EV/tonne of US$85/tonne).