Barak Valley Cements

Barak Valley Cements trades at a P/E which is lower than that of other smaller cement companies
BARAK Valley Cements, a mini cement company with operations the in north–eastern part of the country, enjoys one of the highest realisations per tonne basis given limited competition in its markets. No doubt the northeastern region has grappled with an uncertain operating environment, given rebel movements in various states and relative economic backwardness, but this region has also witnessed strong demand for cement over the past few years.

For instance, in the key Assam market alone, total cement consumption amounted to 1.65 million tonne in FY 09, as compared to 1.05 million tonne in FY 06. This has been primarily due to government-funded infrastructure and development projects, coupled, with rural housing projects.

However, despite the growth in cement consumption in the region, analysts point to cement supply lagging demand although exact figures are difficult to get. As a result, a large part of the supply to the northeast comes from players outside the region. Hence, for companies such as Barak Valley Cements, it provides growth opportunities over the medium term. Also, Barak Valley Cements, given its location, enjoys various fiscal and tax benefits, including excise duties exemption, income tax benefits and working capital interest subsidy.

Capacity:

The company’s cement capacity at the end of FY 09 was 2.47 lakh tonne, expanded from 1,51,800 tonne in FY 07 at a cost of Rs 23 crore. Barak Valley’s plant is located in Assam’s Karimganj district and is well connected to the key consumption centers, including Guwahati, Shillong and Agartala.

In addition, in late FY 08, Barak Valley, through its subsidiary Badarpur Energy, had brought on stream, a 6 MW biomass-based power plant. This project was set up at a cost of nearly Rs 35 crore. These projects have been financed through an IPO of Rs 23.77 crore in October 07, coupled with internal accruals and loans.

Barak Valley Cements also enjoys synergies with regard to key raw materials for cement production, such as limestone and coal. In the case of limestone, its requirement is largely met from its subsidiary Meghalaya Minerals & Mines, whose operations are not too distant from its cement plant.

Financials:

Barak Valley Cements’ standalone operating profit margin declined 900 basis points to 24 % during the June 09 quarter despite net sales that improved 24.1 % to Rs 28.7 crore. Pressure on its operating profit margins in the June 09 quarter was due to higher costs for power, oil & fuel, which was not offset by higher realisations.

The company’s despatches amounted to 52,133 tonne in the first quarter of FY 10, a rise of 14 % and realisations grew an estimated 9.8 % to Rs 5,510 per tonne. For all-India player ACC, its realisations were estimated at Rs 3,840 per tonne during the June 09 quarter, a rise of 13 %.

Valuations:


Barak Valley Cements trades at a P/E of 8.3 times which is lower than that of other mini cement companies like Sagar Cements and Shiva Cement. The stock could be a value buy for the long term.

Stock views on ACC, Mundra Port, Idea Cellular, Ambuja Cements, GMR Infrastructure

HSBC on GMR Infrastructure
HSBC maintains the `Underweight' rating on GMR Infrastructure with a target price of Rs 53. There has been no respite in GMR's existing business. GMR's airport business faces: a) continuing decline in air traffic b) continuing delays in real estate development at Delhi airport, impacting fund availability, and c) inability to raise tariff at the Delhi and Hyderabad airports, impacting overall profitability. However, there has been some relief in the power business due to fresh gas supply and lower naptha prices. GMR runs a refinancing risk on the loan at the end of the two-year period. HSBC expects that in order to complete the Delhi airport in time, the government will have to provide incentives to GMR. These incentives might be in the form of allowing it to charge higher user fees or a higher equity contribution to meet the fund requirement. However, given the current financial condition of the airline industry, it would be difficult for the government to increase the charges without opposition from the airline industry. The outlook for the company remains weak given: a) no signs of recovery in airport traffic growth b) the ability to increase airport charges remains dependent on the government's approval c) no improvement in real estate outlook d) potential difficulties in refinancing its acquisition.

Merrill Lynch on Ambuja Cements

Merrill Lynch maintains `Underperform' rating on Ambuja Cements due to lack of upside triggers. Ambuja's CY09 earnings decline will likely be modest versus other majors due to a tad better supply-demand outlook for west India. Ambuja sells ~30-40% of volumes in the west, which is forecast to witness fewer capacity additions versus other regions. However, exposure to the north will likely hurt. Ambuja's CY08 EBITDA stood at ~Rs 1,770 crore, down ~13% y-o-y due to cost-led margin pressures. The company indicated that high-cost coal inventories, greater use of imported coal and year-end adjustments/provisions dragged 4Q results. 4Q realisations were up 1% y-o-y and 3% q-o-q; cost increase was sharper at ~10-12%. Volumes grew 5% y-o-y and 16% q-o-q. In its 4Q press release Ambuja said the industry's demand growth in CY09 will range between 6-8%. This compares with 11-12% volume growth witnessed in November-December 2008, likely led by pre-election government spending. Reflecting the pattern of previous election years, we worry that the recent demand impetus will ease in 3-4 months as elections draw closer.

Indiabulls Securities on Idea Cellular

Indiabulls Securities has reiterated the `Hold' rating on Idea Cellular, however, it has downgraded the target price to Rs 49. Idea ended the third quarter with a handsome topline growth of 13.1% q-o-q, backed by a robust 13% share in the all-India net additions of 38 lakh and a 3.7% improved realisation of 65 paise per minute. Idea's market share (excluding Spice) is to inflate beyond 11% by March 2010 from the current 9.9%. The company's share of the market net additions is likely to peak at 14-15% in FY10, given the upcoming roll-outs in five new circles and the overwhelming response received for the roll-out in Bihar and the re-branding in Punjab. Moreover, Idea's brand, which has all-India recognition, renders it a competitive edge over the other entrants in the new circles. The operating margin will likely remain under pressure in FY10E-11E and is expected to come down to ~11% as Idea opts for higher opex rather than capex for network expansion. In addition, intensifying competition and penetration in Class C circles calls for competitive pricing, which would further bring down ARPUs to around Rs 250 and Rs 210 for FY09E and FY10E respectively. While the company's business model points towards a strong longer-term growth trajectory, the upcoming congestion in the telecom market would exert significant strain on its key operating and financial parameters, thereby limiting major upsides in the stock price.

Citigroup on Mundra Port

Citigroup initiates `Sell' rating on Mundra Port and Special Economic Zone (MPSEZ) as the stock looks expensive. MPSEZ is a private port (capacity ~55 mtpa) on India's west coast:
1) Strategically located for north-bound cargo;
2) Handles more container volumes than all major ports, except JNPT and Chennai;
3) Has one of the deepest drafts;
4) ~40% of projected volumes are under long-term contracts; and
5) SEZ over ~32,000 acres should support volume growth.

Cargo/profits growth has been impressive at 53%/132% CAGR over FY04-08. Citigroup expects cargo, revenues and profits to grow at 17%, 25% and 47% respectively over FY09-11E, and RoEs to improve to 24% by FY11E from 11% in FY08. While Citigroup forecasts healthy cargo growth at MPSEZ, they see risks in the medium term given the deteriorating global environment. Volumes at major ports grew only by 4% y-o-y in April-November 2008 and fell 28% y-o-y in December 2008 at the DP World-operated container terminal at Mundra. A pullback in investments would hit development of the SEZ, a growth driver for the port. We value: 1) the port at Rs 262/sh; 2) SEZ at Rs 22/sh; 3) investments in subs at Rs7/sh. MPSEZ trades at 24x FY10E PE, a premium of ~85% to Asian ports' average of ~13x, which we find excessive despite EPS growth of 47% over FY09-11E versus the Asian average of -1%. Upside risks include better-than-expected traffic growth and demand for land at the SEZ.

Macquarie on ACC

Macquarie lowers the rating on ACC from `Neutral' to `Underperform' in the absence of cost-reduction levers and the stock lacks any positive catalyst except for cement prices. It believes that the current rally in the stock along with an improved business outlook is a good opportunity to book profits. ACC declared its CY08 results, which were about 11% below the estimates at the operating level due mainly to lower volumes and higher costs. Macquarie reduces the target price by 2% to Rs 452 to factor in lower volumes for the next year and also reducing CY09 and CY10 estimates to account for lower volume expectations because it foresees some delays to expansion plans. ACC has already exhausted the easy ways to reduce costs because most of its production is based on domestic subsidised coal. It already has coal-based captive power plants and it is reaching saturation in blending. The only major avenue is a merger with its sister concern, Ambuja Cements. The majority of 7 mtpa of further expansion will not be completed until CY10. ACC will, at best, grow in line with the industry.