With elections in Tamil Nadu next year, India Cements believes the government would expedite infrastructure projects, resulting in a degree of demand revival in the southern market. However, the capacity overhang in the south will continue as additions of over 30 million tonnes (MT) become operational over FY10-FY11.
India Cements’ 1.5 MT cement expansion project in Rajasthan is progressing as per schedule and should be commissioned in June this year. Based on expanded production, volume growth estimates are 20 per cent and 12 per cent for 2009-10 and 2010-11, respectively. The company is likely to incur a total capex of Rs 1,500 crore over the next two years, for which it has raised debt to the tune of Rs 550 crore. It is also incurring $20 million for the acquisition of a 30 MT coal mine in Indonesia. The company is confident of mining captive coal in 2010-11, thereby lowering its coal cost going forward.
Pricing pressure is likely to continue in the south with oversupply setting in. Being a fragmented market, cement players are likely to battle for market share, undercutting prices. India Cements’ stock is trading at 20 times its 201011 estimated earnings. It is trading at 8.5 times its two-year forward earnings for the base business and Rs 25 for the company’s India Premier League (IPL) cricket team. Maintain sell.
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