Solidifying Value - Andhra Cement

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Most of the investors would be obviously amazed to see Andhra Cements (ACL), a BIFR company, as our low price scrip. Despite being a BIFR company, there are compelling reasons behind recommending ACL. The foremost reason is good financial performance for the quarter ended March 2009. The second factor is the difference between the company’s enterprise value and the value of its total capacity, proving a good scope for upward movement.The third and the most important factor is, the scrip is well placed on the valuation front also. The CMP of Rs 29.50 discounts its FY09 earnings by 5.85x and the EV/EBITDA stands at 10x. Now this may appear on the higher side. But if we compare the same with 10x and 11.50x respectively of Sagar Cement operating in similar territory and of similar capacity it seems to be better placed. If all these factors are considered, we recommend the investors to buy the scrip at current levels with a target price of Rs 42 in next one year. Further, the promoters have themselves invested at Rs 28.90 providing a cushion at those levels.

ACL is Andhra Pradesh based cement manufacturer with current manufacturing capacity of 1.40 million tonnes (Vishakhapatnam) and is adding another 2.10 million tonnes (which is under progress at Guntur) taking its total capacity to 3.50 million tonnes. The new capacity is expected to go on stream in the next two months. Now if we calculate the total value of its 3.50 million tonne capacity after assuming modest estimates of replacement cost Rs 4000 per tonne, total value or replacement cost stands at Rs 1400 crore. But at the same time, if we take a look at its total enterprise value, market cap of Rs 391 crore, current debt of Rs 270 crore and the additional debt on account of recent capex of Rs 402 crore, the total cost arrives at Rs. 1063 crore. So this clearly provides a scope for further upward movement.

On the operational front, the despatches have increased and the realization has also improved. The same has been translated into company’s Q4FY09 results where the company has posted a topline of Rs 111.22 crore and bottomline of Rs 14.20 crore as compared to 82.06 crore and Rs 17.32 crore respectively in March 2008 quarter. The operating margins got impacted due to higher power cost and also the repairs and maintenance cost that company incurred in September 2008, but which were accounted in the last two quarters. The increase in demand is mainly in smaller cities, rural areas and government infrastructure projects. With rural demand and infrastructure projects expected to remain buoyant after the certainty at the Centre, we expect Q1FY09 results to be good for the company. The margins are expected to improve further as the repairs and maintenance cost will not be charged going ahead.[PAGE BREAK]

For FY09 ACL has posted a topline of Rs 371.12 crore and bottomline of Rs 63.01 crore. With the increased capacity and improved margins, ACL is estimated to put up good performance in FY10 also. Hence we recommend investors to buy the scrip at current levels with a target price of Rs 42 in next one year.