Heidelberg Cement-Structural Shift BSE 500292; CMP Rs 49 Equity Rs 226 crore Cash In Hand-Rs 498 crore as of December 2009 Cash per share: Rs 22 Effective Cost per share-Rs 27 (CMP-Cash In Hand) Total Capacity Under Operation-3. Capacity Utilisation- Capacity To Rise To-5.0 Mn TPA by March 2012, with little debt on books. Ownership-69 per cent Heidelberg, Germany FII/DII-9 per cent Public Float-22 per cent Structural Shift Cement demand to enter new growth trajectory: Driven by a structural shift indemand drivers, the cement industry is at an inflection point as growth trajectory is estimated to shift upwards from its historical average of 8% to 10-12% over 5 years. Higher cement consumption (~1.5x from 1.25x of real GDP growth) is expected in the next trillion dollar (NTD) phase of GDP. We believe all ingredients are in place for the cement industry to move from a cyclical to a secular growth story.
Capacity utilization will surprise positively…: With most of the capacity additionexpected to be operational by FY11, we estimate the industry's capacity utilization will bottom out by 2HFY11. With strong demand growth, excess capacity is expected to be absorbed faster by FY12. This will lay a solid foundation for the next growth phase as no major capacity additions have been planned beyond FY12. We estimate capacity utilization will bottom-out at 75% in 2QFY11 against 71% in 2QFY02 (the previous cycle).
…leading to positive surprise on pricing, profitability…: Given strong volumegrowth (10-12% v/s flat in FY01) and higher consolidation (the top 5 groups control 56% of capacity v/s 48% in FY01) will result in better operating parameters than in previous cycles. Hence, we anticipate the return of pricing power to the industry by 2HFY12 for a longer period, supported by strong secular demand growth and higher consolidation in the industry. A decline in average cement prices will be lower and operating margins (26% in FY11 v/s 13% in FY03) will be higher than the trough of the previous cycle.
…driving sector re-rating: Strong secular growth, higher consolidation and a stronger balance sheet would act as a catalyst for re-rating of the cement sector. We estimate cement stocks will bottom-out at higher valuations (than pervious cycles) over the next 2-3 quarters as cement prices remain volatile due to the impact of new capacities.
However, a structural shift would be the key driver of premium valuations in the next upcycle. Cement stock valuations are attractive and offer a good entry point for the next upcycle. We prefer companies offering strong volume growth, cost saving possibilities and a strong balance sheet. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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