Buy India Cement; target of Rs 190: ICICI Direct

India Cement (ICL), as one of the largest cement manufacturers in the southern region, is expected to be a key beneficiary of a demand revival in the key south regions, especially Andhra Pradesh (AP) and Telangana. Out of the total cement capacity, 45% of the company’s capacity is in AP & Telangana, which witnessed a significant price hike of Rs 60-70/bag in September 2016. The price hike was supported by an uptick in demand and pricing discipline. Although the impact of the price hike will be miniscule in Q2FY17E (as the hike took place at the end of the quarter), we expect the impact of increased prices to be fully visible from Q3FY17E onwards. Apart from price hikes, ICL is taking steps to improve cost efficiency by increasing usage of pet coke, incurring capex to improve plant efficiency and increasing captive power consumption, which we believe will aid margin expansion. Further, limited capacity addition in the south would help the company to improve its capacity utilisation over the longer term. The stock is trading at attractive valuation of US$80/tonne. Hence, we upgrade the stock from to BUY with a revised target price of Rs 190 (i.e. valuing at EV/tonne of US$90).

With better realisations in the south, limited capacity addition and improved demand outlook on the verge of formation of new state, we expect utilisation to improve from here on. The company’s pragmatic approach towards cost rationalisation through improving fuel mix, installation power plant in AP and improving efficiency of plants should help improve margins, going forward. With the better operating cash flow, we expect debt levels to reduce in the next two years. The stock is trading at attractive valuation of US$80/tonne, which makes it a compelling buy at this level. Hence, we upgrade the stock to BUY with a revised target price of Rs 190 (i.e. EV/tonne of US$90). 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.