| India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs220 Back in the reckoning Key points -
Prime beneficiary of upturn in south: In FY2006 cement consumption in the southern region grew by 25%. With large infrastructure projects and manufacturing bases of MNCs coming up in the region, consumption is expected to grow at a CAGR of 11% for the next few years. Also fresh capacities here shall come up only in H1FY2009. Hence cement prices are expected to remain firm for the next two years. Thanks to its high leverage to cement prices, India Cements Ltd (ICL) shall benefit the most from this boom. -
More growth from capex plan: Encouraged by the improvement in its financials and considering the scope for more improvement, ICL plans to raise its capacity by 2 million tonne by December 2007 at a cost of Rs350 crore. This shall take its total capacity to 11 million tonne. The entire capex shall be funded by the proceeds of a recent FCCB issue. -
Balance sheet transformed: With bouts of capital infusion through various routes, viz private placement, debt replacement and GDR issue, ICL's balance sheet has improved in the past few years. Its debt/equity ratio has come down to a much respectable 1.8:1 in FY2006 from 6:1 in FY2005. With a strong free cash flow, we expect the ratio to drop further to 0.3:1 in FY2008. The RoNW should also improve from 4.3% in FY2006 to 27.7% in FY2008. -
Trading at a huge discount to peers: At the current market price of Rs220, ICL is trading at 8.8x its FY2008E earnings and 6.1x its EV/EBITDA. On an EV/tonne basis, it is trading at USD109 per tonne of cement. That's a huge discount of 30% to some of its peers who are trading at an average valuation of USD150 per tonne of cement. In view of the steep growth expected in its earnings and the improvement in its balance sheet, the discount is not justified. We recommend a Buy on ICL with a price target of Rs315.
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