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Improving utilization & debt reduction to drive growth

Nuvoco is the fifth-largest cement group in India and one of the leading players in East India in terms of capacity. Its businesses consist of Cement, Ready-Mix Concrete and Modern Building Materials, which includes a range of over 60 products which meet the needs of individual home builders and institutional infrastructure development. Nuvoco provides best-in-class cement products such as Concreto, Duraguard, Double Bull, Premium Slag Cement, Nirmax and Infracem. It has 11 cement plants across 7 states with total capacity at 23.8 MnTPA and over the last five years it has been doubling its installed capacity and establishing itself as one of the fastest-growing cement companies in the country.

Healthy growth prospect of the industry: India is the second largest cement producer in the world however its per capita cement consumption is low at 240-250/kg as compared to the world average of 500-550/kg. This means there is a huge scope of growth of improvement which is expected to be driven by government investment towards infrastructure, increasing demand for housing and real-estate sector and capacity expansion by the players (~80-100MT by FY25 and adding 145-155 MT capacity by FY27). Further, the demand for the cement sector globally is expected to grow at 5% however for India it will be growing at double the rate by a CAGR of 8-9% from 350-375 MT to 400-425MT in FY24 and up-to 500-550 MT till FY27.

Capacity addition in North meanwhile growth strategy to be followed in the East region: Nuvoco has continuously added capacity in the past and now it has reached 23.8MnTPA. Going ahead as well the company plans to expand its capacity by 1.2MTPA in FY24 and take its total capacity to 25MTPA, along with other brownfield expansions in Nimbol, Bhiwani, Sonadih Siding and Jaspur Siding. Overall capex spend would be Rs 580cr for FY24 out of which Rs 120cr was spent in Q1 while ~Rs 100cr is expected to be spent in Q2 and remaining in 2HFY24. 

Debt reduction to be key focus area: The company's primary focus is to reduce debt and bring down the net debt from Rs 4500cr to Rs 3,000-3,500cr but we believe it would be at a gradual pace given the concerns of elevated raw materials impacting profits in east regions. So, post reduction of debt their plan is to set up additional capacities in North and West India

 Outlook & Valuations: Nuvoco plan is to focus on debt reduction & improve utilization but not be aggressive in capacity addition for next 1-2 years. Ahead, their focus will be in driving the top line & bottom-line by increasing the share of premium products from 37% to 40%+ which are Concrete Uno or Duraguard Micro Fibre as well as focus on the sales of high demand products and improve capacity utilization. Besides, their focus will be on getting high realization from markets in East and North as well as the idea is to improve sales in markets like Bihar, Bengal, Jharkhand, Gujarat and Rajasthan. Lastly, additional revenue will be earned from Haryana market post its commissioning of the Haryana plant. On the profit front, Its EBITDA/ton is likely to improve from Rs 644/ton in FY23 to Rs 826/ton by FY25E, driven by improving product mix & utilization level as well as some moderation in raw material prices. We estimate its revenue/EBITDA to grow by 11.4%/22.5% over FY23-25E and initiating coverage with a Buy rating and a target price of Rs 455, valuing at EV/EBITDA of 10x on FY25E EBITDA.

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