Heidelbergcement India (HCIL) is a part of 147 years old Heidelbergcement group of Germany - the 4th largest cement producer group in the world. HCIL has 6.26mnT installed capacity. It gets majority of its revenue from Central India. The Central region is safe for cement players given its demand-supply dynamics with no major coming capacity additions. HCIL has gradually strengthened its balance sheet through repayment of debt worth of Rs.181.2 cr between FY18-20 and it has plans to repay more debt worth of Rs.125 cr and Rs.120 cr for FY21 and FY22, respectively. We expect that Covid-19 led lockdown and slowdown in the economy will lead to degrowth in revenue in the near term but lower costs will drive EBIDTA growth. The industry has a higher dependence on real estate and infra sector which is expected to post slow growth due to expected slowdown in the economy. A slowdown will bring down volume growth which will bring down capacity utilization and that may result in softening of cement prices. However, FY22 will be a turnaround year for the industry and HCIL.
Valuations & Recommendation:
We expect that the company will get benefit from the strong share in Central India, lower petcoke and coal prices with investment in captive power plants, no further Capex, repayment of debt and strong working capital. Covid-19 led lockdown will adversely impact in Q1FY21 and partly in Q2FY21 with lower utilization, expected shortage of labour, an expectation of sharp fall in real estate and infra development which could lead to 1% CAGR in top-line and 4% EPS CAGR over FY20P-22E. Company is trading at an EV of $77.8/T which is at a discount to replacement cost which is ~$110/T EV/Tone. Due to its smaller size with no further Capex plans its valuation will stay at a discount to larger players. We feel the Base case fair value of the stock is Rs.194 (EV/Ton of $86 or 15.0xFY22E EPS) and Bull case fair value is Rs.206 (EV/Ton of ~$92 or 16xFY22E EPS). Investors willing to take some risk can look to buy the stock at the CMP and add on dips to Rs.159-163 band (~EV/TON of $74 or 13.2xFY22E EPS). At the CMP of Rs.177 it is quoting at EV/Ton of $70 or 12.5xFY22E EPS.
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