>UNDERVALUED MIDCAP CEMENT STOCKS (HDFC SECURITIES)

Cement stocks have run into resistance after rising sharply over the last few quarters on concerns of supply glut in certain pockets of the country later this year. However in this note we focus on three stocks that offer some upsides in terms of their valuations despite the current concerns over the industry prospects. The plants location of these three companies are mainly in areas where large new capacities are not expected to come up in the next 2-4 quarters. Further contrary to expectations, cement prices have begun to rise over the past few weeks on account of varied reasons including shortage of railway wagons, setting in of busy construction season, demand due to commonwealth games, rise in coal prices, disruption in Andhra Pradesh due to agitation, etc.

While JK Cement will benefit out of the recently commissioned 3 MT plant at Mudhol (Karnataka) – total capacity now is 7.5 MW – JK Lakshmi Cement could benefit out of the 1.1 MT expansion that went on stream in last quarter of FY09 (full impact likely in FY10). Compared to the EV/EBITDA and EV/Ton enjoyed by the larger players in the industry of 4.5 and 105 respectively, the valuation parameters of these two companies are cheap even discounting the size difference. Even in terms of EPS, we could see a better numbers going ahead due to higher capacity available for FY10 (despite a fall in realizations – to the extent it happens).

Heidelberg Cement is a subsidiary of world’s fourth largest Cement manufacturer Heidelberg of Germany. Though its expansion plans are not likely to come on stream before FY12, it has some catching up to do compared to the valuations enjoyed by the subsidiaries of world’s 2nd largest producer Holcim (ACC and Ambuja Cement). Further having regard to the weak financial position of the parent, some corporate action and value unlocking as a result of that is also possible (though the timing thereof could be uncertain). Compared to the EV/EBITDA and EV/Ton enjoyed by the MNC players in the industry of 5.5 and 110 respectively, the valuation parameters of Heidelberg is cheap even discounting the size difference.

To read the full report: CEMENT STOCKS