Recommendation From Cement Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon. 

SHREE DIGVIJAY CEMENT COMPANY : GOOD PROSPECTS AHEAD 

HERE IS WHY
✓Good financial improvement
✓Good growth prospects
✓Focus on cost reduction

Shree Digvijay Cement Company Limited (SDCCL) was incorporated in 1944. The company is engaged in the manufacturing and selling of cement. It caters to the domestic as well as export markets. Shree Digvijay Cement Company has a manufacturing facility at Sikka, Jamnagar. The manufacturing capacity stands at 1.20 million TPA.

As per Union Budget 2019-20, the government is expected to upgrade 1,25,000 km of road length over the next five years. Due to the increasing demand in various sectors such as housing, commercial construction and industrial construction, the cement industry is expected to reach 550-600 million tonnes per annum (MTPA) by the year 2025. The company reported net sales of Rs 97.01 crore in September 2020, down by 2.21 per cent from Rs 99.21 crore in September 2019. Its PBIDT was at Rs 10.46 crore in September 2020, down 45.84 per cent from Rs 19.31 crore in September 2019. It reported net profit of Rs 2.56 crore in September 2020 against net profit of Rs 8.63 crore in September 2019. 

The company reported EBITDA of Rs 100.91 crore in FY20, an increase of 280.41 per cent. It had reported EBITDA of Rs 26.53 crore in FY19. The higher EBITDA was mainly due to higher market realisation, raw material cost optimisation, reduction in overall fuel cost and sustainable plant operations. The company reported PAT of Rs 56.44 crore in FY20, an increase of 2,638.33 per cent. It had reported PAT of Rs 2.06 crore in FY19. 

The company does not import any raw material to manufacture cement. A major raw material for the company is limestone which it gets from its own mines. Other raw material like gypsum is available close to the location of the plant. The company has a monopoly in ‘oil well’ cement brand which is a special kind of cement used by oil exploration companies like ONGC and Oil India. Oil well cement contributes 15-17 per cent of the revenue. The company’s 40 per cent profit comes from oil well cement and has high margin.

SDCCL has high growth potential in the cement sector backed by strong brand image, monopoly in oil well cement brand and and operational efficiency. It is expected to perform better in the coming period backed by improved realisation with increase in demand for cement as infrastructure and construction activities start picking up. Moreover, low raw material cost and better operational efficiency will aid margin improvement going ahead.

The company’s concerted efforts throughout last year resulted in reduction in variable cost per bag along with higher realisations from the market. Numerous initiatives on the procurement front enabled the company to moderate the impact of increasing freight and lower absorption of fixed costs due to less production. It continues to focus on optimising costs, improving operational efficiency and further strengthening the brand. The demand for cement may continue to be driven further by the pick-up in infrastructure projects viz. bridges, roads, ports, metro rails and low-budget housing segment, bringing opportunities for growth in this sector. There is a short-term dip in demand due to the pandemic’s impact. Its ROE and ROCE for March 2020 stood at a comfortable position of 22.78 per cent and 29.22 per cent. The company is now debt-free. By virtue of these factors, we recommend our reader-investors to BUY this stock.