HeidelbergCement: Recommendation Review

We had recommended HeidelbergCement in DSIJ Issue No. 6 (Dated February 27-March 11, 2012), when it was trading at Rs 36. Our recommendation was backed by factors like its new capacity getting operationalised in June 2012, a decent performance in the December 2011 quarter, along with a positive outlook for the cement sector and lower valuations on an EBITDA/tonne basis.

At the current level, we are of the opinion that investors should hold on to the counter as the government’s thrust on higher infrastructure spending in FY13 and cold commissioning of a 3 MTPA cement plant by June 2012 will drive revenue growth in FY13.

Moreover, as mentioned earlier, after adding capacity, the stock is available at the lowest EV/tonne as compared to other players. This stands at Rs 2078 against that of JK Lakshmi Cement (Rs 3545), India Cements (Rs 3533), JK Cement (Rs 2671) and Madras Cements (Rs 5594).

For the March 2012 quarter, the company has reported a decent recovery sequentially (over the December 2011 quarter). The net sales of the company grew by 10.4 per cent QoQ to Rs 287.69 crore and its net profit stood at Rs 11.43 crore against a loss of Rs 1.8 crore in the December 2011 quarter. This was on the back of a jump in cement dispatches during the quarter, which grew by 7.1 per cent QoQ to 0.784 million tonnes, and the rise in the cement realisations, which improved by 3.1 per cent to Rs 3551 per tonne.

At a CMP of Rs 30, the stock is trading at a PE of 23x with its CY11 EPS at Rs 1.29. The higher PE is on the back of the losses incurred by the company in the last two quarters. However, on an EV/tonne basis (Rs 2078), it still looks attractive as compared to other players. Also, given the kind of earnings growth that we expect from the new capacity, coupled with an improving economic situation and higher spending by the government on the infrastructure front, we recommend that investors hold on to the counter for another 15-18 per cent of an upside in the next one year.