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Our Take:

NCL Industries Ltd. (NCL) was incorporated in 1979 and has ~40 years of experience of operating into cement industry. It is a key cement player in the AP & Telangana (~80% of cement revenue). It has 2.7 MTPA of cement capacity, 2.6 MTPA of clinker capacity, 90000 TPA of cement board capacity, 15.75 MW of hydro power plant and 1000 doors/day of doors capacity. We believe further growth will be driven by increase in capacity - cement and growing doors business revenue.

We expect COVID-led lockdown and slowdown in the economy to lead to subdued growth in volumes for NCL in FY22E but buoyant cement prices and aggressive control on variable costs are likely to drive EBITDA growth. The industry has high dependence on real estate and infra, which are likely to be impacted by the economic slowdown. The key growth drivers of demand are likely to be rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and increased spending on infrastructure development.

Valuations & Recommendation:

We expect the company to benefit from 1) its established presence, 2) capacity expansion to fuel growth, 3) diversified revenue stream and value-added products in cement (Cement Boards and RMC), and 4) industry triggers like higher realizations.

Cement companies are valued (EV/T or EV/EBITDA) based on their capacities, regional diversification, and Balance Sheet strength. Smaller companies are generally valued lower because of regional concentration, limited scale of operations, lower pricing power; however, stocks get re-rated post announcing growth plans, successfully executing expansions and forays into new markets, thus reducing concentration risk on earnings.

We think NCL can post 7% CAGR (over FY21-FY23E) in net sales to Rs.1584 cr, 8% CAGR in EBITDA to Rs. 332 cr and 13% CAGR in PAT to Rs.185 cr.

We believe the base case fair value of the stock is Rs.304 (FY23E EV/T of $57 and FY23E EV/EBITDA of 4.7) and the bull case fair value is Rs.335 (FY23E EV/T of $62 and FY23E EV/EBITDA of 5.2). Investors can buy the stock at the CMP (FY23E EV/T of $49 and FY23E EV/EBITDA of 4.1) and add on dips to Rs.219 (FY23E EV/T of $43 and FY23E EV/EBITDA of 3.6).

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