Initiating Coverage | Prism Cement Ltd. | Ramp-up in Utilization in all segments to drive growth
IndiaNivesh Securities Pvt Ltd
26 Jun 2014
Available for Immediate Download
Initiating Coverage | Prism Cement Ltd. Ramp-up in Utilization in all segments to drive growth CMP: Rs.74 | Rating: BUY | Target: Rs.117 Since our Idea note dated May 5, 2014 (at then CMP of Rs 50), Prism Cements stock has delivered 48% absolute return. Demand revival leading to higher capacity utilization levels in FY15-16E (across all business segments) when coupled with cost saving initiatives/ operational efficiencies across all business segments, would translate to ~Rs 1.8 bn of cost savings. Accordingly, we expect EBITDA margins to improve from ~2.7% (in FY14) to ~9.7% (in FY16E). Using sum-of-the-parts based valuation methodology we arrived at revised PT of Rs 117. Given the 58% upside we maintain BUY on the stock. Investment Rationale Cement- cost savings to push-up margins: With no new plant coming up (except R-Infra’s Maihar plant) in Central India, PCL’s cement plant would gain the most from demand revival. With new silo blending plant functioning, captive coal mining started and other cost saving initiatives, we expect cement division to report ~Rs 1,370 mn of cost savings in FY15E. Already we had glimpse (smaller extent) of these initiatives in Q4 numbers. We expect Cement business EBITDA margins to improve from 3.5% in FY14 to 13.1% in FY16E. TBK- Worst is behind, expect sharp profitability growth: PCL enjoys strong market positioning with the TBK (Tiles, Bath Fittings and Kitchen) business. With all power issues resolved, we expect ramp-up in operations. This when coupled with savings on the cost front (as 43% of capacity has switched from high cost power to low cost power), we expect sharp improvement in the segment profitability. RMC- Utilization levels to catch-up: Economic slow-down took a big toll on RMC business of PCL. With market revival on cards and RMC plants running at ~46% utilization, there exists ample scope for catch-up in business without pursuing any further capex. With ramp-up in business, we expect sharp turn-around in the RMC business margins from here-on. Also, favorable policy announcement for RMC segment would be aiding growth prospects. Valuation If we look at last 7 years trading history of PCL, then PCL stock has traded in a wide band of 1.7x-27.3x on forward EV/EBITDA basis. In the past financial performance of the company has been affected due to cyclical nature of cement business, power issues at TBK segment. At CMP of Rs 74, PCL is trading at FY15E and FY16E, EV/EBITDA multiple of 13.3x and 7.0x, respectively. Using SoTP based valuation methodology, we arrived at PT of Rs 117/share. Given the 58% upside, we recommend BUY on the stock. At our PT of Rs 117, PCL stock would be trading at FY15E and FY16E, EV/EBITDA multiple of 19.2x and 10.6x, respectively.