Buy Deccan Cements Ltd For Target Rs.416 - HDFC Securities
Deccan Cements is a 35 years old brand in south India. It has a strong market position in South Indian Region. It has a 2.25 MTPA of cement capacity and 1.8 MTPA of clinker capacity and operates from a single location in Bhavipuram near Hyderabad. It's 35% of revenue comes from Andhra Pradesh, 15% from Telangana and remaining from other states. Robust debt free cash rich balance sheet enhances its capability to undertake brownfield expansions in future.
We expect that Covid-19 led lockdown and slowdown in the economy could lead to subdued growth in volumes for Deccan Cement for FY21 but benign raw material price, higher realisations and aggressive control on variable costs are likely to drive EBIDTA growth. The industry has a high dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy. Going forward, we expect, a gradual recovery in cement demand and volumes are likely to pick-up from H2FY21 onwards. Also, on the demand side, key growth drivers are likely to be picked up in rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and spending on key infrastructure projects.
Valuations and Recommendations:
We expect, that the company will get benefit from the strong regional presence, improvement in utilization (Q2FY21 81%). We like Deccan Cement due to its extensive retail presence in the lucrative regions, substantial ongoing cost reduction and healthy balance sheet.
Robust balance sheet enhances its capability to undertake brownfield expansions. We expect, 10% CAGR in top-line and 11% EPS CAGR over FY20-22E. At the LTP, the company is trading at FY22E EV/T of $22.6/T, 3.26x FY22E EV/EBITDA. We feel the base case fair value of the stock is Rs.385 (FY22E EV/T of $32.5/T, 5.0x FY22E EV/EBITDA) and the bull case fair value is Rs.416 (FY22E EV/T of $35.1/T, 5.0x FY22E EV/EBITDA). Investors can buy the stock at LTP and add on dips to Rs.323-325 band (FY22E EV/T of $27.4, 3.9x FY22E EV/EBITDA).
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