Deccan Cements Ltd : Clinker expansion to commence by FY25; retaining a Buy - Anand Rathi Shares and Stock Brokers
Clinker expansion to commence by FY25; retaining a Buy
Deccan Cements’ Q2 was hit by weak demand in its operating region and further by heavy rains and higher costs. While the clinker expansion is on track, EC for the Vizag unit continues to be delayed. While firm volume growth is likely only post expansion, the net-debt-free balance sheet is still firm. We retain our Buy on the stock, at a lower TP of Rs.614 (earlier Rs.672).
Seasonality factor curbs volumes. Heavy rains in its operating region (AP/Telangana) curtailed demand, resulting in Deccan Cements Q2 sales volumes slipping 5% y/y to 0.42m tonnes. Realisations dipped 0.5% y/y to Rs4,336 a ton. Cement prices were hiked by Rs30-25/bag in Oct and Rs20- 25/bag in Nov to pass on rising costs. Demand was guided to be firm, backed by various government expenditures. But with the delay in expansion timelines, no major volume growth is expected in the next 2-3 years. We expect cement volumes/revenues to clock 2%/4% CAGRs over FY22-25.
Cost pressures squeeze margins. High costs in a weak quarter restricted the company from passing on the high-cost impact vai price hikes. Overall EBITDA fell 56.5% y/y to Rs168m and EBITDA/ton, 54% y/y to Rs404. The company procured most of the coal from the Singreni mines. While availability is not an issue, higher fuel costs may continue to hurt its operating performance. We expect EBITDA to clock a 1.7% CAGR over FY22-25.
Expansion update, Valuation. EC for Nalgonda 1.3m-ton clinker expansion has been received and land purchased for the 0.8m ton Vizag GU (EC pending) where expansion is guided to be complete by Q4 FY25. For the 1.2m-ton Nellore GU expansion, land procurement is ongoing. Of Rs7.5bn capex, Rs2.5bn would be spent on the expansions in FY23. The Vizag GU will cater to Vizag, Odisha and Eastern Chhattisgarh; and the Nellore GU to Karnataka, TN and Kerala. We introduce FY25e and retain a Buy rating, at a lower TP of Rs614 on FY25e EV/EBITDA of 7x. Risks: Demand slowdown; rise in input costs.
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