Monday, September 10, 2012


Getting into the big league; new capacity to prune costs; Buy
We recently met the management of Heidelberg Cement to get latest business updates. Doubling of capacity to 6m tons and the resultant operating leverage (up to `300/ ton in cost savings) would enable Heidelberg to deliver a 65% profit CAGR over CY12-14. We raise CY13 profit estimates by 3% and upgrade the stock to a Buy. Our target of `58 is based on 6x CY13e EV/EBITDA.

 Capacity expansion benefit in 2013. Heidelberg’s ongoing 2.9m ton cement expansion at MP and UP will be commissioned by Nov’12; benefits will come from the 26% volume CAGR over CY12-14. Of the `14bn capex for expansion (US$70/ton) and cost rationalisation (conveyor belt), `13bn has been spent till now. Heidelberg sells most of its output in the Central (high-utilization) and West (high-growth) regions. Management expects double-digit demand growth with a stable price regime in the Central region (65% of sales).

 Significant cost savings. The `2bn capex for conveyor belt (it now utilises trucks to transport limestone) would result in savings of `100/ton on entire capacity. We expect another `200/ton cost savings from lesser power and fuel consumption at the new unit and lower fixed-costs-perton (brownfield expansion with no staff or fixed-overheads increases). We expect EBITDA/ton to rise from `460 in CY12 to `740 in CY13.

 Balance sheet to get better. Current net debt of `7.5bn is likely to have peaked. With no major capex plans for CY13, the company will generate positive FCF. This would generate additional returns through dividend payouts. We estimate return ratios over CY12-14 to jump sharply.

 Change in estimates. Our CY12/13 profit estimates are changed -18% / +3% due to revised assumptions of volume and realisations.

 Valuation. At our target price of `58, the stock is trading at 9.2x PE and EV/ton of US$66 on CY13e. Risks: fall in prices, delay in capacity ramp-up.

To read report in detail: HEIDELBERG CEMENT