More steam left in mid-cap cement stocks

Even as these stocks have trebled this year, the expected demand growth, capacity expansion and discounts to large-cap peers indicate further upside

Mid-cap cement players such as JK Lakshmi Cement, JK Cement and Orient Cement, along with Mangalam Cement and Dalmia Bharat, have hit new 52-week highs recently, post declaration of their September quarter results. While the first four have seen 19-62 per cent year-on-year growth in revenues, Dalmia Bharat has lagged, with a 2 per cent fall in revenues. However, the rebound in profitability of Dalmia Bharat with 30 per cent year-on-year growth in Ebitda (earnings before interest, tax, depreciation and amortisation) boosted its stock price.

Ebitda growth of the other four has been higher by between 58 and 223 per cent. The profits of the first three players have grown almost twofold or more while Mangalam saw profits grow 80 per cent -- Dalmia’s losses have reduced. What’s more, there are more upsides for these companies, both in terms of financial performance as well as share price gains, say market experts.

Apart from improving fundamentals, cement stocks have been riding on expectations of demand growth in the coming days. Profitability has improved significantly as all-India cement prices are up on a year-on-year basis. The players with exposure to South India too have benefited as per-bag cement prices improved by almost Rs 100 on a year-on-year basis in parts of erstwhile Andhra Pradesh after the formation of Telangana. The South-based players have also seen a good run-up on the bourses, but the excess capacity situation still continues. Thus, comparatively, North-based players are expected to benefit more as demand improves going ahead.

The above mentioned companies are also trading at substantial discounts to their large-cap peers even after the run-up this year, and hence there is still scope for further gains. For instance, large-cap peers as ACC, Ambuja Cement, UltraTech and Shree Cement are trading at a replacement cost of $140-212 a tonne, whereas these mid-cap players are trading at $50-110 a tonne.

Also, these players are expanding capacities, which will benefit them as cement demand picks up, compared to those like Ramco Cement who do not have capacities coming up in the near future.

Amongst the mid-caps, JK Lakshmi Cement, which is a north and west-based player having 6.4 million tonne (mt) capacity, is increasing the same to 10 mt besides expanding its presence in eastern and central India. The company expects to have 1.5 mt of clinker capacity and 1.7 mt of grinding capacity ready by December 2014 at Durg. Split grinding facility at Orissa, however, remains delayed due to clearances, which Shailendra Chouksey, wholetime director, JK Lakshmi Cement, expects to be commissioned by March 2016. The stock price has risen nearly five times in 2014. But, even at Rs 382, it trades at a replacement cost of just $103/tonne based on FY16 capacities.

JK Cement, which saw a meagre 2 per cent revenue CAGR over FY11-14, is now seeing benefits accrue as capacities are getting commissioned. Its 3 mt per annum grey cement plant and the split grinding unit in Jhajjar, Haryana, were commissioned in June 2014 while the integrated unit at Mangrol, Rajasthan, and clinker production started recently. The stock price, which is up 3.8 times in 2014 to Rs 654, indicates a replacement cost of $110/tonne. The consensus target price at Rs 716 also suggests about 10 per cent more upside.

Orient Cement, the Telangana and Maharashtra-focused player, has also seen its stock rise nearly four times in 2014. The company’s capacity expansions in Karnataka are progressing well and are likely to be completed by the start of FY16, taking the total capacity to 8 mt per annum. The stock, priced around Rs 141 levels, is trading at low replacement costs of $85/tonne. The consensus target price at Rs 170 also shows a 21 per cent upside from current levels.

Mangalam Cement having exposure to north, west and central India is also a favourite of analysts. After brownfield expansions, its capacity will rise 63 per cent compared with FY14, taking the total capacity to 3.25 mt per annum. The stock (up over three times in 2014) at Rs 334 is trading at a replacement cost of $52/tonne. While the low valuations are partly justified, given the small capacity, there is still room for upside given the consensus target price of Rs 384.

Dalmia Bharat’s new capacities at Belgaum (2.5 mtpa) and Calcom (0.9 mtpa of grinding unit and 1 mtpa clinker plant) are expected to be commissioned by March 2015. The stock priced at Rs 502 is up threefold in 2014 so far, and the consensus price of Rs 525 indicates another 4-5 per cent upside.