>DALMIA CEMENT (KIM ENG)

Outlook for cement, sugar improving

DCB will benefit from rising cement demand as the housing market recovers as well as new road construction in Southern India. We forecast cement sales to rise 50% on a 150% increase in total
capacity. We do not expect sharp decline in cement prices, if any, and that market demand matches supply. Sugar earnings should increase to 10% of total earnings (up from 4% last year) on 100% increase in selling prices.

Total FY10 revenue of Rs25bn, up 40%
Cement sales should rise 50% to 5m tonnes. We believe that cement demand may rise 8% due to greater gov’t spending on infrastructure and rural housing in the South. Cement prices could fall 4% at most in H2 but price declines should be offset by increasing economy.

FY10 gross margin should increase 3% to Rs1.7k/tonne
This year, the coal cost for DCB should decline 10% to Rs6k/tonne on lower prices for imported coal (currently down by 50% from their peak in FY09). With a new power plant, power cost should fall 7% this year. We expect FY10 cost of production to decline by 9% to Rs2k/tonne.

FY10F EPS of Rs47 up by 28%
Last year, earnigns fell 62% on a one-time loss of Rs1.6bn (FX loss, loss on asset sale). For FY10, the company does not plan to sell assets and has lowered FX risk through currency hedges against foreign debt. With higher sugar prices, we expect sugar earnings this year of Rs430m, up from Rs16m last year. For every Rs1 change in sugar prices, net profit changes by Rs140m.

Net D/E of 1.6x
DCB said that the repayment schedule for outstanding debt of Rs23bn will not negatively impact liquidity. Over the next 3 years, we forecast a free CF of Rs13bn, enabling the company to proceed with expansion.

Trading at low PER of 3x FY10F
The stock trades at a 50% discount to peers. Our TP of Rs230/sh is based on discounted CFs.

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