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Pick of the Week: Buy Heidelberg Cement at CMP and add on dips to Rs135-138 band

HDFC Sec | 13 Nov, 2017  | Follow Author | Add to my Favourites 
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Heidelberg Cement India Limited (HCIL) is a subsidiary of global major HeidelbergCement Group, Germany, having its major operations in Central India. The company manufactures and sells cement in India under its brand “mycem cement”. The company has a total capacity of 5.4 Mn Tonnes. Company’s plants are located at Ammasandra (Karnataka), Damoh (Madhya Pradesh) & Jhansi (Uttar Pradesh).

Investment Rationale:

- Catering to the high demand bearing central region;

- Less of capacity additions, consolidation among the industry to help company up its operating rates and maintain prices

 elevated levels;

- Government push to the infra sector and affordable housing augur well for company in terms of demand for cement;

- Increasing utilization levels to help improve profitability on account of positive operational leverage effect;

- Cash generation and no need of further capex to help company repay its debts and improve its capital structure;

- Large global promoter may help company grow inorganically with expansion in newer geographies;

- Fundamentally strong with improving margins, good return ratios, negative cash conversion cycle, declaration of first time ever dividends, etc.


- Highly competitive cement industry;

- Rising fuel and coke prices may dent the margins;

- Cyclicality in demand from infra / housing sectors

- Weak monsoon in the coming fiscal may bring down company’s revenue prospects.

View and Valuation

HCIL is one of the leading cement industry players in central India with large built up capacities. With no expectations of capacity additions in the central region, the already established players are expected to maintain a pricing discipline in the region and the price realizations are expected to stay at current elevated levels. With the government impetus to the infrastructural development like road building and other infra projects and also government’s efforts towards Housing for all through affordable housing projects, the demand for cement is expected to grow/maintain at current levels. This will help HCIL derive good growth in its revenues through higher volumes and attractive realizations.

HCIL has a high fixed cost component in its cost structure due to which higher capacity utilizations (expected to rise to ~88% by FY19E – from 83% in FY17) can result in positive operating leverage over FY18E-FY19E. Also, the excess cash generated through its operations will be used to pay off and reduce its debts in absence of any major capex in the coming two fiscals. This will help company improve at PAT levels. HCIL has declared dividend @20% for FY17 for the first time since FY98, reflecting the confidence of the management in the future of HCIL.

HCIL’s parent company from Germany is a strong positive for the company as the parent may help it grow inorganically in the years to come through strong presence in globally and the parent’s ambitious plans to grow market share in India. With no major capex requirements, reducing debt scenario, higher utilizations, elevated realizations & a strong parent company, company is expected to do well in the years. The current valuations of $112.4/tonne (H1FY18) for an MNC owned Indian Cement Company leaves scope for an upside.

We think investors could buy the shares at the CMP of Rs.149.25 (~11.1x FY19E EV/EBITDA; $108.2/tonne) and add on dips to Rs.135-138 band (~10.3x FY19E EV/EBITDA; $100/tonne) for sequential targets of Rs.169 (~12.4x FY19E EV/EBITDA; $121/tonne) and Rs.192 (~14.0x FY19E EV/EBITDA; $136/tonne) over the next 4-6 quarters.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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