India Cements

CHENNAI-BASED India Cements seems to have missed out the current rally on the Dalal Street. It gained just 27.5% since the beginning of March ’09, compared with a nearly 101% jump in the Sensex during this period.

India Cements is now one of the cheapest stocks under various valuation metrics — be it price-to-book value, price-to-earnings multiple. For instance, India Cements trades at just 1.2 times its book value. In contrast, Shree Cements with a focus on northern markets, trades at 4.6 times its book value, while UltraTech cement, which also has a presence in the south, trades at 2.85 times its book value. Also, the dividend yield of India Cements at 1.6%, is higher than that of Shree Cement and UltraTech cement.

The Street has been concerned that south-based players like India Cements could grapple with weakening price realisations in future. That’s because the cement capacity in the region is expected to rise from 78 million tonnes in FY 09 to nearly 120 million tonnes in FY 12, and demand growth is expected to be much slower. During the monsoon season there was strong price correction in some southern markets.

However, India Cements has been attempting to diversify its presence beyond the southern markets, and in April 09, it had brought on stream a one million tonne cement grinding unit capacity in Maharashtra. The company is expected to add nearly Rs 350 crore to its net sales in FY 10 from this plant. Long- term investors have recognised this shift in the strategy and there has been a steady increase in delivery trades.

CAPACITY& CAPEXPLANS:

India Cements’ installed capacity at the end of FY 09 was 12.95 million tonnes compared with 8.81 million tonnes a year earlier. As part of this expansion during FY 08, a grinding unit with a capacity of one million tonnes at Chennai was completed in August 2008.

In last two years, the company had invested nearly Rs 1,960 crore in capacity expansion. This expansion has been funded largely through internal accruals. India Cements is expected to end FY10 with a capacity of 14.3 million tones. In the first quarter, it commissioned additional grinding capacity at its Malkapur facility and is working on the upgradation of its kiln at Chilamakur, Andhra Pradesh. And despite this capex programme, its debt to equity ratio was at 0.68 at the end of FY 09, compared with 0.96 a year earlier. It had cash flows of Rs 706 crore in FY 09 and Rs 1,017 crore in FY 08. The company is also building two captive power plants of 50 MW each, at its facilities in Tamil Nadu and Andhra Pradesh, at a cost of nearly Rs 500 crore.

Recently, the company along with its wholly-owned subsidiary, ICL Financial Services, had launched an open offer for Indo Zinc, a loss-making zinc producer. Indo Zinc was implementing a project for setting up a cement plant in Rajasthan with a capacity of 1.5 million tonnes, but this project will now be implemented by India Cements. The cost of setting up this plant in the north along with captive power facilities, is estimated at Rs 600 crore. India Cements had recently raised Rs 592.5 crore via a QIP for its expansion plans. India Cements also owns an IPL team and has a presence in the shipping industry, with small vessels operating in the dry bulk segment. However, the contribution of the non–cement business was very small to its total net sales.

FINANCIALS:

During the June 09 quarter, India Cements operating profit margin declined 500 basis points y-o-y to 30.5% and that’s despite a 9.6% y-o-y growth in its net sales to Rs 960.25 crore. Pressure on its operating profit margins was due to its power & fuel costs that rose nearly 21.4 % y-o-y to Rs 1,011 per tonne, and it offset the 7.8 % growth in cement realisations on per tonne basis.

Stock views on Hikal, HCL Technologies, UltraTech Cement

Sunidhi Securities on Hikal - Target Rs 400

Sunidhi Securities & Finance has recommended a buy rating on Hikal with a target price of Rs 400 in its research report.

"Hikal is committed to creating a world class, customer focused, innovative organisation and becoming partner of choice to the life science industry. In its long association, Hikal is supplying agro chemicals and intermediates to the top four global agro- and fine-chemical players such as Pfizer, Syngenta, Bayer and Degussa. The pharma division is now expecting stupendous growth and is very optimistic about contract research and manufacturing services (CRAMS). Hikal wants to establish itself as among the top companies in the world in the CRAMS business. We recommend 'BUY' with a target price of Rs 400 in the medium term, says Sunidhi Securities & Finance's research report.


Anand Rathi on HCL Tech - Target Rs 375

Anand Rathi Securities has maintained its buy rating on HCL Technologies with a target price of Rs 375 in its research report.

"HCL Tech’s US$-revenue grew 7.6%, margin was up 82bps and profit up 52% sequentially. Pricing strength and IMS growth were surprising. The BPO business turned around from the negative to positive growth zone. We maintain our target multiple of 15x average FY11e earnings of Rs25, thus raising our target price to Rs 375. We maintain our Buy rating. In the past, the stock has traded at a 28% discount to Infosys," says Anand Rathi Securities' research report.

Sharekhan on UltraTech Cement - Target Rs 850

Sharekhan has maintained its buy rating on UltraTech Cement with a target price of Rs 850 in its research report.

"Despite the overall slowdown in the economy the revenue of the company on a stand-alone basis grew by an impressive 16% in FY2009. The strong revenue growth was achieved on the back of capacity addition ahead of peers and a revival in the cement demand in the second half of the fiscal year. We maintain our 'Buy' recommendation on the stock with a price target of Rs 850 (valued at EV/tonne of USD87)," says Sharekhan's research report.

Stock Views on Areva TD, ONGC, Aditya Birla Nuvo, Ultratech Cement, Allied Digital

CITIGROUP on AREVA T&D INDIA - TARGET PRICE: RS 1,809

CITIGROUP Global Markets has assigned a ‘hold’ rating to Areva saying despite the company’s strong fundamentals, the stock is fairly priced. “The stock trades at a P/E multiple of 19.7 times 2009 (estimated) earnings and provides limited upside to our target price of Rs 1,809. Our target price is based on a P/E multiple of 23 times December 2009 set at a 9.5% premium to historical average P/E multiples and in line with ABB,” the Citigroup note to clients said. Citigroup expects Areva’s earnings per share to grow at a compounded annual rate of 32% over 2007-10 (estimated), with a return of equity of around 40%. In comparison, ABB’s EPS is expected to grow at a compounded annual rate of 25% with a RoE of roughly 30%.


MACQUARIE Research on ONGC - TARGET PRICE: RS 995

MACQUARIE Research Equities has given a ‘neutral’ rating to ONGC, as it feels that attractive valuations are offset by lack of earnings growth. “ONGC is trading at undemanding valuations of 7.7 times FY3/09 (estimated), but it also lacks growth, as a corresponding rise in subsidy burden wipes out a bulk of its gain from a rise in oil price re-alisations,” the Macquarie note to clients said. Earlier this week, ONGC Videsh (OVL), the wholly-owned subsidiary of ONGC, had an-nounced a recommended preconditional cash offer to acquire Imperial Energy Corp, an oil E&P (exploration and production) company with assets in Russia and Kazakhstan for £1.4 billion.

Sharekhan on ADITYA BIRLA NUVO - TARGET PRICE: RS 2,035

BROKERAGE firm Sharekhan maintained its ‘buy’ rating on Aditya Birla Nuvo even though it feels that the firm may have overpaid for its acquisition of Apollo Sindhoori Capital investments Ltd. “We believe ABN has paid substantial premium for the buy, considering the valuations at which the listed peers are trading and the bleak near-term outlook for the broking industry. Nevertheless, the acquisition provides ABN entry into broking business and may hold value in the long term,” the Sharekhan note said. “We remain positive on ABN on account of its presence across diversified businesses. In the near term, the stock would have the trigger on account of the insurance bill that is expected to allow higher foreign direct investment in the sector,” it added.

CLSA on ULTRATECH CEMENT - TARGET PRICE: RS 791

CLSA has resumed coverage on UltraTech Cement with a ‘buy’ rating and price target of Rs 791. It feels that while domestic prices should drop over the next 9-18 months due to an adverse demandsupply regime, UltraTech’s improving sales mix should keep blended realisations flat over FY08-11CL. “EBIDTA margin is set to fall due to higher cost but it will be the most moderate decline. Its 9% volume CAGR over FY08-11CL should help drive a 4% cash-earnings CAGR. At 5.8 times price/cash flow, downside is limited,” said the CLSA note.

Alchemy Share on ALLIED DIGITAL - TARGET PRICE: RS 1050

Alchemy Share and Stock Brokers has rated Mahashtra Seamless a ‘buy’with a price target of Rs 873. “With increasing activity E&P (exploration & production) in the oil & gas sector in India, demand for seamless pipes is expected to rise over 10% in the next five years. MSL, being the leader, the company will be the major beneficiary of this demand,” the Alchemy note to clients said. “Further, implementation of city gas distribution network (CGD) in 200 cities as planned by Gail will improve the outlook for ERW pipes. MSL, being one the two key players in ERW segment, is set to benefit from increased demand,” the note added.