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Recommendations India

India Cements Company Update

April 21, 2014, Monday, 03:03 GMT | 22:03 EST | 07:33 IST | 10:03 SGT
Contributed by Angel Broking

India Cements, south India’s largest cement manufacturer, is set to witness revival in its business fortunes. This would be due to an expected pick-up in cement demand in its key markets. Its stock is currently trading at an attractive valuation. We recommend a Buy on the stock

Stock available at an attractive valuation: India Cements is trading at an attractive valuation of US$53/tonne (vs replacement cost of US$140/tonne), ie at a huge discount to valuation of many of its large cap peers (EV/tonne in the range of US$110 to US$168) and its other mid-cap peers like Ramco Cements (currently trading at US$76/tonne). We believe such a huge discount is unjustified considering the expected improvement in demand – supply dynamics and the bottoming out of capacity utilization in south India.

To be a major beneficiary of cement demand pick-up in south India: South India’s cement demand growth has lagged that of the country over the past few years largely due to de-growth in Andhra Pradesh, which is a key market in the south. While we expect the country’s overall cement demand to pick-up going ahead due to improvement in economic scenario, we expect creation of Telangana state wef June 2014 to be the key catalyst for demand pick-up in South India. India Cements with ~60% of its cement capacities in Andhra Pradesh would be a key beneficiary of this pick-up in demand.

Outlook and Valuation: India Cements’ stand-alone return ratios have remained subdued over the years due to weak profitability. However, we expect the company’s earnings profile to improve going ahead due to better demand and realizations resulting in higher return ratios. The company recently announced a merger of two of its subsidiaries Trinetra Cement and Trishul Concrete Products with itself. This is a move in the right direction as it would result in a healthier Balance Sheet considering India Cements’ substantial advances and investment in these companies. We recommend a Buy rating on the stock with a SOTP-based target price of Rs.108.

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