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Growth to normalise after stellar performance…

NCL Industries’ FY21 performance improved sharply with the company reporting revenue growth of 47.5% YoY to | 1383.7 crore along with EBITDA margin expansion of over 556 bps to 20.4% and PAT of over | 148.8 crore despite pandemic woes. Significant volume catch-up from Q2FY21 onwards supported by firm realisations helped NCL to post a healthy performance. Although Q4FY21 margins remained lower at 16.4%, this was partly led by cost pressures (higher petcoke, fuel prices) and the change in sales mix (increase in non-retail share) due to pick-up in infra that led to 2% QoQ drop in realisations. Going ahead, commissioning of WHRS (8 MW) and improved pricing environment would provide a cushion against the rise in cost of production. The WHRS, which got commissioned, would likely bring cost savings of over | 25 crore on a full year basis. Further, the company has planned a capex of | 300 crore though which NCL would increase its cement capacity to 3.6 MT from 2.7 MT by FY23E. Overall, we continue to remain positive on the sector.

Infra, rural segment to keep demand momentum healthy

NCL operates in South India (80% cement business comes from AP & Telangana). It has clinker and grinding capacity of 2.6 MT and 2.7 MT, respectively, cement bonded particles boards (capacity of 90000 TPA), hydro power plants with total capacity of 15.75 MW and also recently added a plant to manufacture premium doors with a capacity of 1000 doors/day. Post recording 31% YoY growth in volumes in FY21, we expect growth in the cement business to normalise till the new capacity comes on stream. Further, we await more clarity on the growth prospects of its door business division for a further re-rating.

Cement capacity to increase by 0.9 MT; to reach 3.6 MT

NCL’s cement division has room for additional grinding capacity considering the installed clinker capacity. The board plans to set up a 2000-3000 TPD grinding capacity plant in Vizag. The total capex is estimated at | 300 crore of which | 200 crore is likely to be incurred in FY22E. With current total debt being over | 400 crore, we expect debt levels to increase further in FY22E. Further, expansion in the same region (AP, Telangana), which has excessive capacity compared to the other regions, may pose challenges from a longterm perspective.

Valuation & Outlook

With targeted sales volume of ~2.6 MT, we expect growth to normalise to 8.2% in FY22E after stellar performance. We also expect RoCE to come down by 290 bps due to capex. Further, we await further clarity on the growth prospects of its door business division. With a positive sector outlook, we change our rating on the stock from REDUCE to HOLD with a revised TP of | 240/share (at 6.5x FY23E EPS, implied EV/tonne of $75/tonne, earlier TP | 120).

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