7/30/2019 Midcap Cement Stocks_Update 24Mar2011
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Institutional
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Mid-cap cement stocks
Steep valuation gap makes them long-term value bets24 March
2011
India
Cement
Recommendation summary
Company RecoTP(`)
Upside(%)
ACC UP 833 -19.6
Ambuja UP 118 -10.6
Ultratech UP 915 -10.1
Grasim OP 2,670 9.0
India Cem OP 140 65.7
Shree Cem N 1,725 -8.0
Orient Paper OP 80 70.0
Birla Corp NR -- --
J K Cement NR -- --
OCL NR -- --
Source: Indiabulls research.
Performance (%)
1m 3m 1yr
ACC 2.2 -3.4 8.3
Ambuja 6.7 -3.9 13.0
Ultratech 5.4 -3.1 -8.1
Grasim 8.1 6.1 15.6
India Cem -1.0 -11.6 -30.4
Shree Cem 9.5 -6.0 -15.3
Orient Paper -7.6 -17.2 -3.6
Birla Corp -0.5 -15.8 -17.6
J K Cement 0.2 -11.5 -27.1
J K Lakshmi -5.6 -18.2 -37.3
Madras Cem -2.3 -8.6 -19.1
Mangalam Cem -3.9 -17.9 -37.0
Heidelberg Cem 10.1 -9.0 -24.2
OCL 3.1 -5.5 -9.6
Prism Cem -3.3 2.9 -1.0
Nifty 0.8 -8.4 4.9
Sensex 0.2 -8.9 4.3
BSE Mid-Cap 0.7 -13.2 -1.5
BSE Small-Cap -2.1 -15.6 -6.9
Source: Bloomberg.
Rajan [email protected]+91 22 3045 8074
Divyah [email protected]+91 22 3045 8056
Even while we have been cautious on the cement sector given
the
likelihood of demand-supply imbalance over FY11-13 (see our
initiating
coverage dated 2 December 2010: Valuations defy fundamentals:
Sellinto H2 strength), the frontline cement stocks (ACC and Ambuja)
have
moderately outperformed Nifty over the past one year, while
stocks in
the mid-cap and small-cap space have underperformed Nifty by
6-42%
and the BSE Mid-Cap Index by 0-36%. The outperformance of
cement
stocks in the large-cap space has been driven by flow of news
about
cement price hikes over the past five months and implementation
of
production and price discipline amongst the companies.
While the mid-cap cement space is an equal beneficiary of the
prevailing
price discipline, the underperformance of stocks in this space
has made
them available at steep discount to the frontline stocks. The
disconnectbetween price curves in the two spaces makes some of the
mid-cap
stocks long-term value buys with a high margin of safety.
In particular, a model company we would like is one whose stocks
are
available at steep discount to the replacement cost (US$100-125
per
tonne) provided it has recently concluded expansion and is
fairly
leveraged. The companies that become interesting bets in this
context
are: J.K. Cement (not rated), India Cements (Outperform, TP
`140), OCLIndia (not rated), and Orient Paper and Industries
(Outperform, TP `80).We like Birla Corpn too on account of its
undervaluation even though itis not a leveraged company.
No rationale for price curve disconnect between large-caps and
mid-caps
We believe the disconnect in price performance between
large-caps (modest
outperformance to Nifty) and mid-caps (steep underperformance to
Nifty and BSE
Mid-Cap Index) in the cement sector is unjustified given that
smaller companies are
equally exposed to industry dynamics such as benefits of price
and production
discipline, impact of government-induced cost push, and excise
duty rejig.
Mid-caps available at steep discounts to replacement cost
Post recent underperformance, many mid-cap cement stocks are
available at almost
50% discount to replacement cost and P/BV of less than 1x
against the 30-75%
premium to replacement cost and P/BV range of 2.7-3.1 x
commanded by
frontline companies.
Leveraged players with volume growth seem good long-term value
plays
In particular, a model company we would like is one whose stocks
are available at
steep discount to the replacement cost (US$100-125 per tonne),
if it has recently
concluded expansion and is fairly leveraged. The companies that
become interesting
bets in this context are: J.K. Cement (not rated), India Cements
(Outperform, TP
`140), OCL India (not rated), and Orient Paper and Industries
(Outperform, TP
`80).We like Birla Corpn too on account of its undervaluation
even though it is not a
leveraged company.
Update
7/30/2019 Midcap Cement Stocks_Update 24Mar2011
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Mid-cap cement stocks
24 March 2011 Indiabulls Research 2
Exhibit 1: Select mid-cap cement stocks at steep discount to
large caps
CompanyCapacity
(mn tonnes)CMP
(`)EV/tonne
(US$)EV/tonne
(US$) - SalesP/BV
Large-caps
ACC 29.4 1,036.0 135 183 3.1Ambuja 23.4 132.0 175 201 2.8
UltraTech 52.0 1,018.0 131 164 2.7
Grasim 52.0 2,450.0 NA NA 1.6
Small- & Mid-caps
India Cements 15.5 92.4 68 103 0.8
Shree Cements 11.6 1,875.0 106 116 3.2
Orient Paper 5.0 47.0 42 49 1.1
Birla Corp 7.0 311.7 56 65 1.2
JK Cement 7.5 131.8 58 87 0.8
J K Lakshmi 4.8 45.0 46 56 0.6
Madras Cements 12.7 97.0 94 177 1.4
Prism Cement 6.0 52.2 96 185 2.1
Hiedelberg 2.4 40.0 45 42.8 1.2
Mangalam Cement 2.0 106.2 32 42.0 0.7
OCL 5.3 103.8 50 78.1 0.7
Source: Company, Indiabulls research.
Exhibit 2: Relative performance vs Nifty
Source: Bloomberg.
Exhibit 3: Relative performance vs BSE Mid-Cap Index
Source: Bloomberg.
AC
C
AMBUJA
ULTRATEC
H
Gras
im
IND
IA
SHREE
OrientPap
er
BirlaCo
rp
JKCeme
nt
JKLaksh
mi
MadrasCeme
nt
MangalamC
eme
nt
HeidelbergCeme
nt
OCL
PrismC
eme
nt
-50.0
-30.0
-10.0
10.0
30.0
50.0
70.0
IN
DIA
SH
REE
OrientP
aper
BirlaCorp
JKCement
JKLak
shmi
MadrasCement
MangalamC
ement
HeidelbergCement
OCL
PrismC
ement
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
7/30/2019 Midcap Cement Stocks_Update 24Mar2011
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Mid-cap cement stocks
24 March 2011 Indiabulls Research 3
Key to Indiabulls Institutional Equities
recommendations:Outperform= Expectedtotal return is more than
15%Neutral= Expected total return is less than 15% but more than
zero.Underperform= Expected total return is negative
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