Heidelberg Cement: a good long-term buy

Though Heidelberg Cement has reported weak quarterly numbers for the first quarter of 2015-16—net profit fell to Rs 3.35 crore, from Rs 11.85 crore last year, a fall of 72% year on year (y-o-y), analysts are getting bullish on the counter. This is because of improvements in the company at the operational level. For instance, its capacity utilisation increased to 87% in the current quarter compared to 76% last year. Heidelberg also reported the highest ever quarterly sales volume of 1.18 million tonne, up 14.1% y-o-y. However, realisations fell 6.3% due to pricing pressures prevailing in the central India region. Since the cost per tonne of cement remained flat, the company's earnings before interest, taxes, depreciation, and amortization also fell 26% y-o-y.



The company's capacity expansion— capacity doubled from three million tonne in 2013 to 5.4 million tonne now—has also affected profitability, as demand remained subdued. However, its limited capacity addition plans in central India region, which accounts for 94% of Heidelberg's sales volume, should improve things in the coming years. Cost-cutting efforts should also help the company improve its margin in the coming years. For example, its conveyor belt project, that connects limestone reserves and clinker units, has replaced transportation via trucks and should result in cost savings of around Rs 50 per tonne. The company's waste heat recovery plant is also expected to be commissioned in 2016.

Heidelberg India's parent, Heidelberg AG, is the world's third-largest cement manufacturer, with a consolidated revenue of €13 billion in 2014. The India business is likely to benefit from its German promoter's rich experience. Heidelberg India is also looking to ramp up capacity in the country through the inorganic route. Reportedly, it is bidding aggressively to acquire Lafarge India's cement units that are coming up for sale in Eastern India.

Due to the contraction in its net profit in the recent past, the counter may look expensive in terms of PE, but it is one of the cheapest stocks in terms of PB. Though the near-term slowdown in demand could put pressure on revenue in coming quarters, sales and margins are expected to improve from the second half of 2015-16.

Selection Methodology: We pick the stock that has shown the maximum increase in 'consensus analyst rating' in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.