Add Heidelberg Cement India, target Rs 215: Centrum Broking

Centrum Broking has given an 'add' recommendation on Heidelberg Cement India with a target price of Rs 215.

Shares of Heidelberg Cement India traded at Rs 188.8 around 1:20 pm on 2 August, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Brokerage's rationale:


Realisation gains continue but nearly peaks out, no major decline in volume
Realisation rose nearly 9.6 per cent year-on-year (YoY) to Rs 4,630 per tonne without much impact on the volume as demand in key HEIM markets was healthy.

Volume fell marginally by 1 per cent YoY to 1.26mmt. The capacity utilisation (CU) hovered nearly 95 per cent.

As per the brokerage, this will restrict HEIM’s further aggressive volume growth. The premium products contributed 13 per cent of the total volume.

Strong realisation gains and limited cost inflation boost Ebitda margin
Operating costs grew only nearly 3 per cent at Rs 3,461 per tonne, contributed largely by softening logistic cost and check on other expenditure.

The energy cost however rose by 3.7 per cent YoY to Rs 966 per tonne due to high cost inventory. The logistic cost fell by 3 per cent to Rs 633 per tonne. Other expenditure was higher by 6 per cent Rs 86 crore from Rs 81 crore.

Strong realisation gain and restricted cost inflation helped strong operational performance by HEIM in Q1FY20.

Earnings, valuation and risks
HEIM presence in better priced regions like Central India, its focus on retail segment sales (trade segment) and premium product contribution helped its perform in the recent past (since Q1FY19).

However, HEIM has limited options as its current capacity utilisation is nearly 90 per cent and cost benefits are limited, further improvement will be driven only by realisation gains.

Pricing is likely to have peaked and with limited capacities the performance may be capped in the medium term (till new capacities expansion plans are announced).

"Despite a strong performance, we have estimated earnings of Rs 11.5/Rs12.6 in FY20/FY21, respectively (the de-bottlenecking benefits will be reflected in FY22)," said the brokerage.

"Factoring in the same and ascribing a replacement cost valuation of Rs 900 crore/mmt based on March FY21E capacity assigning a 20 per cent premium, we have arrived at a fair value for HEIM at Rs 215 per share. At our target price, the stock trades at EV/Ebitda of 8.1 times FY21E earnings," the brokerage added.