Stock Pick From The Cement

HERE IS WHY :

• HCI posied to strengthen its presence in Central India
• Reducing debt burden will improve profitability
• The company will benefit from economies of scale

The expected economic reforms after the forthcoming election will bring about resurgence in the Indian economy, from which the cement sector is expected to benefit. The early sign of economic revival can be seen from the share markets sustaining at its all time highs. As many big players looking to cash in during this period, here is one cement company, Heidelberg Cement India (HCI) ready to reap the benefits from increased capacity and economies of scale by expanding the volumes.

HCI is a cement manufacturing company and a subsidiary of Cementrum I B.V., Netherlands, which is controlled by HeidelbergCement AG, headquartered at Germany. The company manufactures Portland slag cement and Portland Pozzolana cement. HCI has completed its brownfield expansion in its Uttar Pradesh and Madhya Pradesh manufacturing facilities and is poised to grow and strengthen its presence in central India.

On financial front, HCI’s revenue increased by 24 per cent, primarily contributed by 25 per cent increase in volumes to 3610KT in CY13 from 2888KT in CY12. The company’s EBITDA increased by Rs 114.8 crore in CY13 against Rs 84.5 crore in CY12. Furthermore, there is an expansion of EBITDA margins to 8.4 per cent in CY13 against 7.7 per cent in CY14 because of the operational efficiency along with increasing volume in central India. However, the company posted a loss of `40.7 crore in CY13 due to higher depreciation cost of `97 crore, more than 3 times depreciation last year and higher interest cost of Rs 105.9 crore, 10 times interest cost last year.

Increased debt burden and higher depreciation cost due to recent capacity expansion are putting pressure on the profitability of HCI. The cement company recently sold its Raigad plant to JSW Steel with the consideration amount of `166 crore, out of which `100 crore were received on January 3, 2014. Further, the company issued Non Convertible Debentures (NCDs) amounting to `370 issued to its parent company. Funds raised from the mentioned activities are expected to be paid to the existing debtors reducing its debt burden. Moreover the promoters of HCI are increasing their stakes in the company via gradually picking up from open market during last four to five years. This event coupled with issuance of NCDs to promoters gives us a confidence about the HCI management’s strong will to develop its foothold in India.

Along with economies of scale due to enhanced volumes post expansion and dis-investment of Raigad plant, the company’s profitability is expected to improve due to savings in transportation costs and power & fuel consumption. On valuation front, HCI is trading at a considerably lower valuation compared to its peers. Hence we recommend to buy this DS stock with a price target of Rs 50.