Prism Cement, one of the biggest gainers in the cement mid-cap space, has seen its share price grow 2.5 times in three months to Rs 76.50. While the optimism on cement demand growth, led by expected revival in economy, has been the key trigger for this stellar performance, the company’s overall profitability, too, has seen a turnaround. Prism’s March quarter performance indicated a good rebound in its cement and TBK (tile, bath and kitchen) segments. According to analysts at Espirito Santo, its operational performance vindicates the expectation of a turnaround in cement and TBK operations.
Prism, which derives 39 per cent of its revenues from cement business, is seeing the segment’s profitability grow even as costs are on the rise. The benefits of higher pet coal usage, better power efficiencies, and higher fly ash usage have started percolating. This has boosted the segments’ per-tonne Ebitda in March quarter to Rs 615, compared to a loss Rs 53 in the previous quarter (Rs 549 a year ago), say analysts at Motila Oswal Securities.
On the other hand, the TBK segment, which contributes 38 per cent to revenues, has been feeling the heat due to higher fuel costs. However, better fuel efficiencies are now helping, boosting investor confidence. The ready-mix concrete segment, the only business that continues to lag, should show improvement once the demand picks up, say analysts who expect the company to post earnings per share of Rs 5.1 in FY16 compared to a loss (Rs 1.9 per share) in FY14. However, after a sharp run-up in the share price, investors need to be cautious on the valuations of cement stocks. JPMorgan analysts say Indian cement stocks are now among the most expensive in the world on two-year forward earnings, even as the return on equity profile is relatively weak, compared to SE Asian companies.
Although some analysts have upgraded their target prices (Espirito Santo to Rs 80 and Motilal Oswal to Rs 67) for Prism Cement, the same shows limited upside for the stock. With the monsoon setting in, it may impact cement demand and realisations. Hence, investors with a medium-term perspective may wait for some correction to enter the stock.