ICICI Direct has a buy call on Heidelberg Cement India with a target price of Rs 165.The current market price of Heidelberg Cement India is Rs 142.50.Time period given by the brokerage is one year when Heidelberg Cement India price can reach the defined target.
View of the brokerage on the company:Limited capacity addition in central region to drive utilisation, pricing: A pick-up in construction activity coupled with better sand availability in Uttar Pradesh drove cement volumes in H1FY19.
Going forward, hike in minimum support prices and higher infra spend are expected to keep cement demand robust.
This coupled with the absence of new capacity addition in the central region is expected to keep utilisation healthy.
Further, consolidation of cement capacity in the region is expected to bring pricing discipline in the region.
Consequently, we expect revenues to increase at 10.5 per cent CAGR in FY18-20E.WHRMS, operating leverage will continue to drive margin expansion: Despite higher pet coke prices, the company was able to control the power cost in Q2FY19 mainly led by higher power generation from WHRS and economic power sourcing during the quarter.
The 12MW WHRS commissioned by the company is expected to help the company reduce power cost by nearly 10-20/t and lower dependence on grid power.
Further, we expect improving utilisation to lead to operating leverage benefit of nearly | 25-30/t.
This, coupled with higher realisation, is expected to drive EBITDA/t from Rs 720/t in FY18 to Rs 926/t in FY20E.Higher cash flows to drive debt reduction: The company is expected to generate free cash flow of Rs 451 crore in FY18-20E.
This cash flow post dividend payment can be used for debt repayment.
Consequently, we expect Heidelberg to repay nearly Rs 370 crore.
Hence, debt/equity can be reduced to 0.3x in FY20E from 0.8x in FY18.Structurally in sweet spot to capture upcoming growth; maintain BUY: With a good Q2FY19 show, we expect healthy volume and realisation growth trend to continue on account of better sand availability in Uttar Pradesh and increase in construction activities post monsoon leading to growth in volumes at 5.5 per cent CAGR in FY18-20E (indicating utilisation improvement from 86 per cent in FY18 to 97 per cent in FY20E).
This coupled with increase in realisation (led by a pick-up in demand) is expected to result in revenue CAGR of 10.5 per cent in FY18-20E.
In addition, operating leverage benefit and cost efficiency are expected to result in margin expansion of 310 bps to 21.1 per cent.
Consequently, we maintain our BUY rating on the stock with a revised target price of Rs165 [i.e.
valuing at 8.0x FY20E EV/EBITDA (@ 20 per cent discount to its peers), $125/tonne on capacity of 5.4 MT].
As the company is expected to reach its peak utilisation levels by FY20E, the growth would moderate going forward unless it being addressed with the new capacity.