Sagar, Orient And Heidelberg: JM Financial Sees Smaller Cement Makers Outperforming Peers
Small-cap cement companies, according to JM Financial Ltd., are set to fare better than their large- and mid-cap peers.
"Smaller players in the cement space are ripe for re-rating, as they have sacrificed volume growth in FY2016-21 to get their house in order," JM Financial said in a report. Now their balance sheets are well capitalised, and they are aggressively expanding to capture share, it said.
The financial services group initiated coverage on Sagar Cements Ltd. and Orient Cement Ltd. with a 'buy', and recommended 'hold' for HeidelbergCement India.
Volumes of large and mid-sized cement companies grew at 8% and 9%, respectively, on an annualised basis over FY16-21. For smaller peers, it was 5%.
Larger firms gained market share because of strong capacity addition, according to the brokerage. "Mid-sized and large players have added 25% and 33% of existing capacity, respectively, over the last five years vis-à-vis 19% for smaller players."
The smaller firms, however, outperformed the sector on operating income, the report said.
During FY2016-21, small players’ Ebitda per tonne rose by Rs 570 and operating income grew at 25% on an annualised basis.
That compares with Rs 330-440 increase in Ebitda per tonne rise and a CAGR of 16-17% for large players.
The outperformance on profitability, according to JM Financial, has been driven by exposure to favourable markets, focus on better pricing aided by peaking clinker utilisations and control over costs.
The cement sector saw strong cash generation over FY21, led by improvement in profitability, partially aided by the release of working capital, it said.
"Strong cash flows have helped drive both the deleveraging exercise and funding of expansion projects," the report said. "Net debt for the sector has declined from its peak in FY19 and net debt-to-Ebitda for the players under analysis is comfortable at -2.4 times to 2.6 times."
The brokerage expects the expansion to drive growth and market share gains for them in the medium term, while reducing regional concentration risk.
"Smaller players are slated to gain capacity share from larger peers," the report said. Cumulatively, the pipeline forms 27% of their existing capacity while large players are constrained by lack of feasible opportunities at 14%, it said.
JM Financial Take On Stocks:
Focus on growth with cost efficient operations, new capacities to drive diversification and beginning of deleveraging phase.
Target price set at Rs 325, an implied return of 28%.
To embark on expansion soon, strong expansion capability with existing resources and one of the most efficient players in the industry.
Target price set at Rs 240, an implied return of 50%.
Heidelberg Cement India
Focus on premiumisation helped growth, lack of capacity expansion despite strong balance sheet.
Target price set at Rs 225, an implied return of 4%.