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Cementing Gains

Valuations of cement stocks seem to be reasonably priced. Companies are upgrading their recommendation to ‘reduce’ from ‘sell’.

Print Edition: June 14, 2007

Edelweiss Securities sees marginal upside in cement stocks: “We are upgrading our fundamental view on the sector on the back of invalidation of price freeze by scrapping of countervailing duty, demand-supply dynamics and no serious threat from imports. Valuations of cement stocks seem to be reasonably priced.

We believe domestic prices are likely to remain at Q1, 2007-8 levels in the monsoons (Q2, 2007-8) and rise moderately by Rs 5 a bag each in Q3, 2007-8 and Q4, 2007-8. Thereafter, we expect prices to be stable and correct marginally by approximately 3-5% in Q2, 2008-9.

ACC: We expect core earnings to grow at a CAGR of approximately 23% in Jan 2006-Dec 2008 earnings. However, on a YoY basis, core earnings growth is expected to slowdown to 9% in Jan-Dec 2008 earnings from 38% in Jan-Dec 2007 earnings and 206% in Jan-Dec 2006 earnings. The company is trading at EV/EBITDA of 7.2 times Jan-Dec 2007 earnings and 6.4 times Jan-Dec 2008 earnings. We are upgrading our recommendation to ‘reduce’ from ‘sell’.

Ambuja Cement: We expect the company’s PBT (prior to extraordinary items) to grow at a CAGR of 13.2% in 12 months Jan 2006-Dec 2008 earnings. However, on a YoY basis, PBT (prior to extraordinary items) growth is expected to be flat in Jan-Dec 2008 earnings. Net profits (including extraordinary items) are expected to grow 60% in Jan-Dec 2007 earnings over Jan-Dec 2006 and decline by 16% in Jan-Dec 2008 earnings. At CMP of Rs 124 a share, the stock is trading at 8.4 times Jan-Dec 2007 earnings and 8.3 times Jan-Dec 2008 earnings. We are upgrading to ‘reduce’ from ‘sell’.

India Cements: India Cements’ EBITDA a tonne is likely to increase to Rs 1,227 for 2007-8 vis-a-vis Rs 913 in 2006-7 but decline in 2008-9 earnings to Rs 1,080. Volume gains are likely to be muted in 2007-8 and grow by 16.8% in 2008-9. Earnings are likely to grow by 48% in 2007-8 and be flat in 2008-9. At CMP of Rs 183 a share, India Cements is trading at EV/EBITDA of 5 times 2007-8 earnings and 4.9 times 2008-9 earnings. We are upgrading our recommendation to ‘reduce’.”

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