Recommendation from Cement sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

SHREE DIGVIJAY CEMENT: BONDING FOR GROWTH

HERE IS WHY
✓Impressive production capacity
✓Growth in revenue
✓Debt-free status

India is the second-largest cement producer in the world and accounts for over 7 per cent of the global installed capacity. The top 20 companies account for around 70 per cent of the total cement production in India. As per the recent Union Budget, there was a marked increase in allocation towards infrastructure. It has increased by 33 per cent on yearly basis to around ₹10 lakh crore. Also, the cement demand is expected to touch 420 MT by FY27. Looking at these opportunities, our low-price scrip for this issue is Shree Digvijay Cement.

Shree Digvijay Cement is part of Cimpor Group. Its basket of products includes special cements like oil well cement, sulphate-resisting Portland cement and railway sleeper manufacturing cement in addition to other varieties of ordinary Portland cement. It has a fully computercontrolled plant and has a production capacity of 1.30 million tonnes per annum. Well-connected by road, rail, air and sea, Digvijay Cement has its own port. The company’s prolific experience in the domestic and international markets is now further honed with the Cimpor Group’s management skills and technology. 

The company’s brand ‘Kamal Cement’ is a well-known name in the cement industry. They have a significant market share in Gujarat and internationally in SAARC countries, the Middle East and East Africa. The company has successfully established its presence internationally by exporting varieties of cement and cement clinker to the following countries: the UAE, Somalia, Yemen, Bangladesh, Qatar, Sri Lanka, Iraq, Kuwait, Bahrain, the Philippines and other SAARC and African countries. The company recorded decent performance in the quarter ending December 2022. In Q3FY23, Shree Digvijay Cement consolidated revenue rose by 36.20 per cent YoY to ₹206.44 crore compared to ₹151.57 crore from the previous year’s same quarter.

On a sequential basis, revenue grew by 25.97 per cent. EBITDA dropped by 16.47 per cent YoY to ₹15.99 crore compared to ₹19.15 crore from the previous year’s same quarter while sequentially it increased by 0.94 per cent, the reason being an increase in cost of production due to higher fuel prices. Going ahead, we may see better EBITDA growth as fuel prices have normalised. Net profit, however, saw good growth and stood at ₹10.18 crore compared to ₹7.27 crore, a YoY growth of 40.13 per cent, while sequentially it increased by 60.94 per cent. This was primarily due to tax adjustment. The operating profit margins declined by 490 bps YoY and 192 bps QoQ and stood at 7.75 per cent.

Net profit margin grew by 14 bps YoY and 108 bps QoQ and stood at 4.94 per cent. At trailing 12 months, the shares of Shree Digvijay Cement are trading at a PE of 20.8x, which is slightly higher than its three-year median PE of 17.6x. Nonetheless, looking at the company’s growth in terms of sales and profit, it looks fair. The company has a five-year compounded sales and profit growth of 15 per cent and 54 per cent, respectively. The company has maintained a healthy average (five-year) ROE and ROCE of 14.1 per cent and 20.8 per cent, respectively. The company has healthy CFO and PAT of 1.91. The company is also virtually debt-free with an interest coverage ratio of 61.57x. Looking at higher growth, moderating operating expenses, strong balance-sheet and reasonable valuation, we recommend BUY.