IDEA 2 ACT: Heidelberg Cement India Ltd


CMP (NSE) 15:52, 28 Jul

253.60 -3.8-1.48%





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Last updated on

19 Sep, 2016

Strengthen demand outlook & better monsoon to drive volumes
We expect the cement industry demand to remain robust over FY16-18E. Factors like government infra spending, initiative such as “Housing for All” and normal monsoon to support demand. The pre-election spending in Uttar Pradesh & Madhya Pradesh to accelerate the cement demand in HCIL’s target regions. The company’s target markets (UP, MP, Bihar and Karnataka) have registered satisfactory monsoon after two consistent deficit years. This bodes well for the rural housing demand and HCIL’s cement volumes. We estimate the HCIL’s cement sales volumes to register ~7.8% CAGR over FY16-18E to ~ 5.2 mmt.
Improving utilization levels & cost rationalisation measures to aid margins
HCIL’s capacity utilization has improved from ~83% in FY16 to ~85% in Q1FY17. We believe the utilization levels will further improve to ~89% & ~96% in FY17E & FY18E respectively. Insignificant cement capacity addition in the central region and improved demand outlook in its target markets are the key triggers to drive utilization levels. Besides, it has commissioned ~12 MW WHR (waste heat recovery plant) in February 2016, which accounts for ~30% of its power demand. HCIL to save Rs ~60/Mt of power cost from this WHR plant. Besides, HCIL is using petcoke in the region of 60-70% of total fuel (15-30% cheaper than coal). We believe the lower power & fuel cost, rising utilization level & improving realisations to drive EBITDA margins. We expect the EBITDA/Mt to witness a CAGR of ~23.9% over FY16-FY18E.
Negligible capacity addition in Central region to aid pricing power
Central India region (~90% of HCIL’s volume) is expected to witness healthy volumes and realisation growth. Bettered demand outlook and absence of significant capacity addition will aid this growth. Besides in FY16, its market share improved in central India, and it achieved a volume growth of ~5.1% (yoy). Stabilisation of new capacity & revival in demand will provide HCIL the pricing power in the central region. We expect realisation to remain elevated over the next few years. We have factored in ~3.9% realisation of CAGR over FY16-FY18E.  
Outlook & Valuation
We believe an improving demand outlook in central India augurs well for HCIL owing to the following reasons 1) insignificant capacity addition over the last few years in company’s target markets 2) improved cement demand led by infra & rural spending 3) upcoming election spending in UP & MP markets 4) rising utilisation & cost rationalisation measures taken by the company. Moreover, minimum capex & de-leveraging plans (over next 2 years) through strong cash flows to strengthen balance sheet. We expect PAT CAGR of ~112% over FY16-FY18E. With robust demand scenarios in its markets, improving operating margins and superior return ratios, we believe the company deserves higher EV/EBITDA multiple. The stock is trading attractively at 8.2x FY18E EV/EBITDA multiple. We recommend BUY on the stock with one year target price of Rs 166, based on 10x FY18E EV/EBITDA multiple.
Financial Summary
Rs Cr. FY14 FY15 FY16 FY17E FY18E
Revenue  1,393  2,044  1,655  1,861  2,071
EBITDA  115  322  238  360  424
OPM% 8.2 15.8 14.4 19.3 20.5
PAT  -41  60  39  117  173
EPS Rs -1.8 2.6 1.7 5.2 7.6
P/BV(x) 3.6 3.5 3.4 3.0 2.5
EV/EBITDA(x) 37.1 13.0 17.2 10.6 8.2
ROE % -4.9 6.8 4.3 11.6 14.6

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