>Heidelberg Cement India Ltd (ENAM SECURITIES)

Company background: Heidelberg Cement Ltd (HCIL; erstwhile Mysore Cement - MCL) - Incorporated in 1958 and promoted by Mr. S.K. Birla, is engaged in the business of manufacturing & selling cement. HCIL, with a 3.15 mn. tonnes cement manufacturing capacity caters primarily to central India. In July 2006, MCL was acquired by Heidelberg Cement A.G (Global Cement major) – The deal was done at valuation of $109 EV/tonne.

Investment argument
■ Favourable regional exposure: A “Central Region” centric company, HCIL derives 70% of its sales from central, 23% from western and 7% from southern region, where cement consumption
has grown over 19%, 11% & 3% respectively vs. Industry growth of ~ 10.6% in FY 2010.

■ Turnaround post the takeover: From a net loss of Rs 41 crs (adjusted for CY 06) to net profit of Rs 134 crs in CY 09 shows very strong capabilities of the global cement major in turning around the company through excelling the operational efficiencies which have resulted in net cash generation of Rs 495 crs (~Rs 22 cash/share) till CY 2009.

■ Expanding cement capacity to meet the robust demand in the central region: Cement production capacity to be doubled to 6 mn. tonnes from present 3.1 mn. tonnes till March 2012 (CY 12) through brown-field expansion. Heidelberg cement A.G is targeting to enhance its capacity to 15 Mn. tonnes in India by CY 2014.

■ Funding expansion primarily through internal accruals: 70% of the expansion would be funded through internal accruals.

Valuation
We expect the cement demand in the central and western region to remain strong backed by scaling up of rural and government infrastructure spending. Central region is expected to remain in deficit (DD>SS) at least till FY 2012 due to limited capacity addition and robust demand. Our FY12E growth estimates are conservative despite of assembly elections in U.P. in early FY13 and resultant government spending at least 2 quarters prior to that.

At CMP of Rs 48, the company is available merely at 3.7x CY12E EV/EBITDA (implied EV/tonne - US$ 47 vs replacement cost of ~ US$ 100 -110/tonne i.e. ~ 55% discount). Thus, we recommend a BUY on Heidelberg Cement Ltd for a target price of Rs 64 (target EV/tonne – US$ 60). Hence, a potential upside of 33% over a period of 12-15 months.

To read the full report:: HEIDELBERG CEMENT