IGI Logo

Improving margins to narrow valuation gap vs peers; initiate with a BUY

Nuvoco Vistas Corporation (NUVOCO), led by Dr. Karsanbhai Patel Nirma group, has emerged as the fifth largest cement group in India and is amongst top-3 in East region with 23.8mnte capacity (as of Sep’21), post 8.3mnte acquisition of NU Vista (earlier Emami Cement) in Jul’20. We believe cost synergies from the said acquisition, improved cost efficiencies, higher premiumisation coupled with scale benefits and operating leverage may drive ~30% (Rs265/te) blended EBITDA/te rise to Rs1,180/te over FY21-FY24E. Valuation at 8.6xFY24E EV/E or US$125/te adequately factors concerns around higher East region concentration, higher leverage and lower profitability vs peers, in our view. As NUVOCO narrows its EBITDA/te gap vs peers, valuation gap may shrink. We initiate coverage on the stock with a BUY rating and target price of Rs645/share (11x Sep’23E EV/E). Key risks: lower demand / prices, and high concentration (~70%) in East region.

Utilisation in East unlikely to fall below 80%

over the next 2-3 years despite large capacity additions announced by the industry, given higher growth potential in the region. Prices, hence margins for NUVOCO, are unlikely to fall as East currently likely delivers the lowest EBITDA/te vis-à-vis rest of India for most companies. Recently prices in the East have been hiked by Rs20-25/bag MoM w.e.f. Oct’21 to mitigate cost increases, resulting in current prices being up by 3-4% QoQ and 9-10% YoY during Q3FY22-TD. Q2/Q3 seasonal weakness for East seems largely behind, in our view.

Acquisition of Nu Vista and expansion to drive 12% volume CAGR

over FY21- FY24E. Ramping up utilisation in North (with launch of Double Bull), 1.5mnte grinding unit expansion at Jojobera, Jharkhand, and debottlenecking at various locations coupled with full-year consolidation of Nu Vista would drive 40% volume growth to 22.6mnte by FY24E from ~16mnte in FY21. The proposed ~5mnte Gulbarga greenfield expansion at a capex of Rs30bn provides visibility on volume growth beyond FY25E and market diversification into newer West and Central regions.

EBITDA/te gap vs peers to narrow; industry-leading 22% EBITDA CAGR likely over FY21-FY24E.

Cost synergies from the Nu Vista acquisition (e.g. cross-sourcing of clinker, logistics and procurement synergies, etc. via project SPRINT), improved cost efficiencies (e.g. increasing the share of WHRS, CPP to 70% from the current 50%), increasing the blending ratio from 1.75x currently with the launch of composite cement, higher premiumisation (increasing share of trade sales, premium products, etc.), coupled with scale benefits and operating leverage may drive ~30% rise in blended EBITDA/te (~Rs265/te) to Rs1,180/te over FY21-FY24E.

Net debt to EBITDA’ to fall <2x by FY24E.

Net debt is likely to shrink to Rs46bn by FY24E from the current Rs57bn even as we factor in Rs36bn capex over FY22EFY24E (including Rs23bn for the proposed Rs30bn Gulbarga expansion).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer