8/12/2019 India Mid Caps-Clsa http://slidepdf.com/reader/full/india-mid-caps-clsa 1/17 India mid-caps Market strategy Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com Mahesh Nandurkar, CFA [email protected]+91 22 6650 5079 Abhinav Sinha +91 22 6650 5069 Rohit Kadam +91 22 6650 5037 23 May 2014 India Market Strategy What’s Inside: Minutes of meetings with some mid-caps Large caps vs Mid-caps Earnings Growth Historical Valuations Financial performance Sectorial Valuations Sector views and best picks www.clsa.com Valuation rerating continues BSE mid-cap index is up 29% ytd and has outperformed the Nifty by 12ppts. The BSE mid-cap, still trades at 4% discount to Nifty but now at a premium to its own historical average of 20% discount. Continued outperformance of mid-caps would require higher earnings growth. Currently, consensus expects BSE mid-cap earnings to grow by 26% cagr over FY14-16 as against 15% for Nifty.In a potential economic upturn, this hypothesis should play out driving the outperformance of mid-caps. Our preferred bouquet of 12 mid-caps, offers 27% earnings growth over FY14-16 as against 15% for the coverage universe. Mid-cap themes / our favourite picks q A look at the best performing stocks within BSE Mid cap index highlights that over the last one mont h public sector financials, power utilities, property and agriculture have been the flavour of the market (25%+ up over the last one month). q We continue to believe that revival of capex cycle / investment cycle would be a dominant multi-year investment theme going forward. Commercial vehicles recovery, state owned infrastructure financiers, building materials and housing remain our preferred mid-cap themes. We also like strong bottom-up ideas viz, Motherson Sumi, Marico, IPCA and Petronet LNG. q We cover 43 mid cap (market cap of <US$4bn) across 11 sectors adding up to US$70bn in total market cap and US$260m of daily traded volume. q Earnings of our preferred 12 mid-cap stocks as below are expected to grow by 27% cagr over FY14-16, as against 15% for our coverage universe. q Since our initial report on 13th Mar 2014 (link), our equal weighted mid-cap portfolio is up 35% versus 14% for Nifty. In the portfolio, we remove Tata Power and add Sobha Developers, Hathway Cable, Ramco Cements and Motherson Sumi. q Ashok Leyland - Ashok Leyland is a leveraged play on India’s CV cycle and has historically delivered the best stock returns when bought during CV downturns. q Hathway – As cable operators reap digitisation benefits, Hathway with 7.6m digitised subscribers will be a major beneficiary. Improving ARPUs and potential progress of digitisation Phase III offers high visibility on a 30% Ebitda cagr over FY14-17. q IndusInd – Improving outlook on CV segment and rising Casa ratio (5ppts over the next 2 years) will help gain market share in loans. Highest earnings growth (24% Cagr over FY14-17) bank under coverage. q IPCA – Its US business would expand multi-fold from current 7% of sales over the coming years. q Marico – Rising input copra prices help improve competitive positioning. Discount of c.20% to consumer staples sector. q Motherson Sumi - We expect MSS to deliver a strong 31% consol EPS Cagr over FY14-17 driven by strong o utlook for India business as well as ov erseas subsidiaries. We have a BUY rating on the stock with a target price of Rs340. q Petronet LNG – A play on rising gas imports into India. Expect earnings to triple over the next 4 years with the expected expansion at Dahej and the capacity ramp- up at Kochi. A play on rising gas imports into India. q PFC – It should benefit from regulatory changes and deleveraging in power sector; Attractive with ROE of ~18% and 1.2x FY16CL adjusted PB. Dividend yield of 3%. q Prestige Estates – A play on the best property market i.e. Bengaluru. Pre-sales order book being 2+ years of forward revenues. FY15 lease income of Rs3bn would be more than the interest cost, providing cashflow stability. q Ramco Cements - We see the stock as a potential doubler in next three years led by an improvement in demand environment in south. Cement prices should rise from unsustainably low levels driving a 30% Ebitda Cagr over FY14-16. q Shree Cement – A play on the attractive northern market with aggressive growth plans to expand capacities from current 16mt to 20.5mt by FY15. q Sobha Developers – Expect profit cagr of 25%+ over FY14-16CL as strong pre- sales and continued good residential demand at core Bengaluru market drives revenues. At 11x FY16 PE stock trading c.20% below average.
Large caps vs Mid-caps Earnings Growth Historical Valuations Financial performance Sectorial Valuations
Sector views and best picks
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Valuation rerating continuesBSE mid-cap index is up 29% ytd and has outperformed the Nifty by12ppts. The BSE mid-cap, still trades at 4% discount to Nifty but now at apremium to its own historical average of 20% discount. Continuedoutperformance of mid-caps would require higher earnings growth.Currently, consensus expects BSE mid-cap earnings to grow by 26% cagrover FY14-16 as against 15% for Nifty. In a potential economic upturn,this hypothesis should play out driving the outperformance of mid-caps.Our preferred bouquet of 12 mid-caps, offers 27% earnings growth overFY14-16 as against 15% for the coverage universe.
Mid-cap themes / our favourite picksq A look at the best performing stocks within BSE Mid cap index highlights that over
the last one month public sector financials, power utilities, property and agriculturehave been the flavour of the market (25%+ up over the last one month).q We continue to believe that revival of capex cycle / investment cycle would be a
dominant multi-year investment theme going forward. Commercial vehiclesrecovery, state owned infrastructure financiers, building materials and housingremain our preferred mid-cap themes. We also like strong bottom-up ideas viz,Motherson Sumi, Marico, IPCA and Petronet LNG.
q We cover 43 mid cap (market cap of <US$4bn) across 11 sectors adding up toUS$70bn in total market cap and US$260m of daily traded volume.
q Earnings of our preferred 12 mid-cap stocks as below are expected to grow by 27%cagr over FY14-16, as against 15% for our coverage universe.
q Since our initial report on 13th Mar 2014 (link), our equal weighted mid-capportfolio is up 35% versus 14% for Nifty. In the portfolio, we remove Tata Powerand add Sobha Developers, Hathway Cable, Ramco Cements and Motherson Sumi.
qAshok Leyland - Ashok Leyland is a leveraged play on India’s CV cycle and hashistorically delivered the best stock returns when bought during CV downturns.
q Hathway – As cable operators reap digitisation benefits, Hathway with 7.6mdigitised subscribers will be a major beneficiary. Improving ARPUs and potentialprogress of digitisation Phase III offers high visibility on a 30% Ebitda cagr overFY14-17.
q IndusInd – Improving outlook on CV segment and rising Casa ratio (5ppts overthe next 2 years) will help gain market share in loans. Highest earnings growth(24% Cagr over FY14-17) bank under coverage.
q IPCA – Its US business would expand multi-fold from current 7% of sales over thecoming years.
q Marico – Rising input copra prices help improve competitive positioning. Discountof c.20% to consumer staples sector.
q Motherson Sumi - We expect MSS to deliver a strong 31% consol EPS Cagr over
FY14-17 driven by strong outlook for India business as well as overseassubsidiaries. We have a BUY rating on the stock with a target price of Rs340.q Petronet LNG – A play on rising gas imports into India. Expect earnings to triple
over the next 4 years with the expected expansion at Dahej and the capacity ramp-up at Kochi. A play on rising gas imports into India.
q PFC – It should benefit from regulatory changes and deleveraging in power sector;Attractive with ROE of ~18% and 1.2x FY16CL adjusted PB. Dividend yield of 3%.
q Prestige Estates – A play on the best property market i.e. Bengaluru. Pre-salesorder book being 2+ years of forward revenues. FY15 lease income of Rs3bn wouldbe more than the interest cost, providing cashflow stability.
q Ramco Cements - We see the stock as a potential doubler in next three years ledby an improvement in demand environment in south. Cement prices should risefrom unsustainably low levels driving a 30% Ebitda Cagr over FY14-16.
q Shree Cement – A play on the attractive northern market with aggressive growth
plans to expand capacities from current 16mt to 20.5mt by FY15.q Sobha Developers – Expect profit cagr of 25%+ over FY14-16CL as strong pre-
sales and continued good residential demand at core Bengaluru market drivesrevenues. At 11x FY16 PE stock trading c.20% below average.
Unitech 63.3 1,190Jain Irrigation Systems 55.6 842Rashtriya Chemicals & Fert 43.4 480UPL 37.8 2199HPCL 37.1 2512Jaiprakash Power Ventures 36.4 1,117Suzlon Energy 36.3 856Dewan Housing Finance 36.0 677Uco Bank 35.8 1797Reliance Capital 35.7 2,181TVS Motor Co 35.4 979Indian Overseas Bank 34.2 1,502Union Bank Of India 34.0 2,232Torrent Power 33.0 1,155MMTC 32.9 1,387Indiabulls Real Estate 32.6 606Central Bank Of India 32.5 1,557Oriental Bank Of Commerce 32.0 1,608India Infoline 31.8 524Gujarat State Fert & Chemicals 31.5 514Indian Bank 30.7 1,362GMR Infrastructure 30.7 2,209Syndicate Bank 30.5 1,441Edelweiss Financial Services 29.4 617India Cements 29.3 484Dena Bank 29.1 740Solar Industries India 28.7 415Housing Development & Infras 27.9 674IDBI Bank 27.8 2,381Andhra Bank 27.7 844Source: CLSA, Bloomberg, Top 30 Mid Cap best performers
India’s auto demand is currently going through a cyclical low and M&HCVindustry volumes have declined at ~25% Cagr over FY12-14.
∑ We believe that an improving GDP-growth trajectory over FY15-16 shouldhelp CV industry sales to start recovering by FY16.
∑ Growth rates in CVs are highly volatile and spike up to 30-40%+ levelswhen the cycle turns.
∑ Moreover, replacement demand should also start providing a boost todemand given that the sales volumes as a percentage of installed base at7% is down to a 10 year low.
∑ Ashok Leyland is a leveraged play on India’s CV cycle and hashistorically delivered the best stock returns when bought during CVdownturns. ALL has high operating and financial leverage to the CV cycleand earnings will rise sharply when the cycle turns.
∑ We expect the stock to deliver strong absolute returns as the cycle turnsalthough patience is needed till that happens. This is our preferred pick inthe mid cap space.
∑ In the auto component space we like Motherson Sumi and believe it iswell placed to to deliver robust growth in India given its strong businessfranchise, increasing content per vehicle, likely revival in industry demandand rising exports.
Capital Goods∑ Fast tracking of part of ~US$150bn stalled projects will help revive
revenue growth for Capital Goods companies
∑ Govt measures like fast tracking clearances, coal block auctions, UMPPbids etc will have impact in 2HFY15 in our view.
∑ Power Generation remains especially competitive with new EPC projectsbeing won at <Rs40m/MW.
∑ Metro rail, DFC and Power T&D will drive the order booking for mostCapital Goods companies in the near term.
∑ While the investment demand should improve in FY15 and FY16, there areseveral uncertainties we would rather play that theme with a large cap i.e.L&T.
∑ We have no preferred mid-cap in the sector.
Cement∑ Cement industry has been reeling under severe pressures due to weak
demand, high cost inflation and pricing volatility
∑ We believe that the worst is behind and the industry should see a gradualrecovery from the current levels. Our base assumes demand growthahead of supply over next few years driving capacity utilisation to 80% byFY17 compared to 74% currently
∑ Shree Cement is market leader in north with 13.5mt capacity (grinding).It recently added 2.5mt and would likely be 18mt over next few months.It plans to have total capacity of 20.5mt by fiscal 2015. It has exhibitedstrong execution track record over past few years
∑ Considering north bias, (best geography to be in India. South India hashighest capacity overhang) we estimate volume growth for Shree to be
ahead of the industry for next two to three years. Also, Shree is one ofthe most cost efficient players historically and our best pick. For Shree,we estimate earnings growth to be 54% YoY in FY15CL (after falling 41%in FY14) and 27% YoY in FY16CL
∑ Over the past 5-years, political and social uncertainties in Andhra Pradeshtook a toll on investments and consumption. Resultant GDP deceleratedsharply from an average of 9.5% between FY04-09 to 6.8% betweenFY09-13. The recent passage of reorganisation bill breaking India’seconomically fourth largest state into Telangana and Seemandhraremoves political uncertainty
∑ While near-term volatility may persist, we believe that prices in the regionare unsustainably low and should bounce back. Ramco which is one ofthe leading players in south will be one of the key beneficiary of recoveryin south cement price
Consumer∑ Weak macro has impacted discretionary spending in past several quarters.
Impact is now visible in staples as well with growth moderating acrossmost categories
∑ A&P have peaked but may stay at these elevated levels due to slowdownconcerns. Valuations have moderated across FMCG space due to multipleconcerns on growth and margins
∑ For Marico , we believe that worst is over in terms of volume growth forits key Parachute hair oil segment. With sharp rise in copra (key input)prices, competitive position of the company increases among unorganizedplayers who still control 30-40% of the market. With reasonablevaluations and high on corporate governance, Marico remains ourpreferred pick
∑ Jubilant’s -3.4% YoY SSG severely impacted margins which led to 24%YoY decline in earnings for 4QFY14. Notwithstanding near term pressures,we remain positive on long term opportunity in quick service restaurantsspace of which Jubilant is the key beneficiary
∑ GSK’s focused investments, new launches and distribution expansionalong with nature of its product has helped the company in reporting a15%+ revenue growth, at the time when packaged food companies have
been seeing growth moderation. We believe current punchy valuationsshould continue in this context
∑ Colgate has done a commendable job in gaining/ maintaining marketshare in its core category however, high competitive intensity will keepnear term margins under pressure.
Financials∑ The banking sector will be a key beneficiary of improvement in the
political-economic environment which should abate risks to asset qualityand boost demand for credit.
∑ Based on 4QFY14 results so far, the mid-sized private banks have beenable to report much better financial performance (profit up 25%) whereas
the smaller PSU banks witnessed pressure on asset quality and coreearnings growth.
∑ Private banks’ outperformance has been a reflection of lower exposure toriskier segments, better underwriting standard, improving deposit mix
and stronger fee income.∑ The mid-sized private banks have been able to also leverage the
deregulation of savings deposits to scale-up Casa deposits; whereas thesmaller PSU banks are losing market share.
∑ The PSU banks are also suffering from a sharp rise in operating costs,wage hikes and revision to pension liabilities and that has been a key dragon their earnings growth.
∑ Among the mid-cap banks, IndusInd (BUY) is our top pick led by (1)improving outlook on CV segment and (2) improving deposit franchise(Casa ratio has improved by 500bps over the last two year to 32% andshould improve further to 37% by Mar16) that will help the bank to scale-
up its market share in loans. However, on the mid-sized PSU banks wemostly have a negative view.
∑ Amongst NBFCs, Power Finance Corp (PFC) should benefit fromregulatory changes and deleveraging in power sector; with ROE of ~18%and well capitalized balance sheet it offers attractive dividend yield (3%)and trades at 1.2x FY16CL adjusted PB.
Healthcare∑ Growth in the US market continues to be strong for most companies in
the pharma sector. A number of mid cap companies have started towitness a strong pick up in the US.
∑ While Ipca had capacity constraints, Cadila Healthcare saw a strong pick
up in US growth led by new launches and the momentum is expected tocontinue with more approvals in January. Torrent Pharma has beendelivering strong growth in the US and had an exceptional 4Q led bylimited competition in Cymbalta.
∑ We expect US as % of total sales to rise sharply in case of Cadila, IPCAand Torrent over the coming years.
∑ Implementation of new drug price control regime in second half of 2013resulted in price declines. Additionally, Indian government tightened newdrug approvals norms in late 2012 that impacted domestic growth overthe last year.
∑ With improving earnings visibility and return ratios, we see room for
improvement in mid cap valuations over the coming years.∑ We expect pick up in earnings growth momentum led by ramp up in the
US business in a number of mid cap names. We prefer IPCA and Torrentamong mid-caps while maintain negative rating on Cadila as valuationsare rich.
∑ In case of IPCA, US business would expand multi-fold from current 7% ofsales over the coming years. We see potential for margin expansion withincrease in Indore facility utilization.
Media∑ The two print results released for 4Q - HT and DB Corp - should that Non-
English advertising in print continues to grow at mid-teen levels. Higher
raw material costs, as inventories were bought during a weak currency,led to weaker margins.
∑ Post-election of a stable government, an improvement in corporate andconsumer sentiment is likely. The same should drive a return of
discretionary advertising, particularly in 2H.∑ Our preferred pick in mid cap print media space are DB Corp and Jagran
as both benefit from their leverage to faster growing non-Englishadvertising business.
∑ An interesting trend has been improved performance of radio businessesover last year with HT Media and DB Corp both reporting improvedmargins.
∑ On the distribution side of broadcasting business, the industry has seenan improvement in relations between the MSO and LCO industry. Shift ofthe cable industry to itemized billing is expected to drive sustained ARPUincreases.
∑ Hathway is our preferred pick here, ahead of Dish TV as the formerbenefits from an additional upside from rising cable broadbandsubscribers.
Property∑ During 4Q, residential property sales have seen some improvement in
sales in Bengaluru and Mumbai on a QoQ basis as evident from sales dataprovided by Oberoi, Godrej, Prestige and Sobha.
∑ Gurgaon’s investor driven locations, particularly the Northern PeripheryRoad (NPR), remains a drag on the NCR market. Secondary market pricesin select Gurgaon locations have seen ~10% correction since 2013 peak.As per channel checks, volumes are yet to revive.
∑ Office leasing data across India suggests that leasing has got off to abetter start with across India office net absorption up on a YoY basis. Thisis primarily driven by sustained demand from the technology sector.Domestic economy hiring has yet to pick up.
∑ With election uncertainity over, we would expect residential demand torevive over the year. However, high mortgage rates and higher pricingimplies that a sharp rebound in volumes is unlikely. We prefer Bengalurubased developers as the city has better affordability, followed by Mumbai.
∑ High Bengaluru exposure, pre-sales order book being 2+ years of forwardrevenues, strong balance sheet structure with lease income nearinginterest outgo and continued good execution make Prestige our top pick
in the sector.∑ We also like Sobha as strong pre-sales and continued good residential
demand at core Bengaluru market drives revenues.
Power∑ In the near term the power demand might actually fall – after effect of
recently completed General Elections.
∑ However, with a pick-up in industrial activity the power demand shouldpick-up by 2HFY15.
∑ We believe the domestic coal shortages would become more apparentwith revival in economy / power demand.
∑ Key focus of new Govt for the revival of the power sector should be oncoal production and evacuation. Faster clearances, easing land acquisitionand co-ordinating with the respective state governments would be thekey.
Bengaluru is the bestproperty market and
Prestige estate is abeneficiary of the same;Prestige has among the
∑ Our preferred picks in the space are large caps – NTPC and PWGR. Wehave no preferred mid-cap in the sector.
∑ Our preferred picks in the space are large caps – NTPC and PWGR. Wehave no preferred mid-cap in the sector.
Petrochem∑ While recent spurt in global LNG prices and the expected low utilization
for Kochi terminal will keep FY15 profits muted, we expect Petronet LNG’sprofits to treble in four years.
∑ This is driven by commissioning of the 50% brownfield expansion atDahej and ramp-up in Kochi capacity as phase II of the Kochi pipeline iscompleted.
∑ Nearly all of the expanded 15mtpa Dahej capacity is fully contracted out.We foresee just this contracted capacity at Dahej contributing to over
100% rise in EPS post expansion.∑ Any newsflow on settlement with farmers leading upto re-start of Kochi
pipeline construction and increase in volumes after commissioning of thesecond jetty at Dahej could act as short term triggers for the stock.
∑ We believe that in a medium term India’s demand for gas will continue tooutpace the pace of growth in domestic production and the gap will bemet through imports. Petronet LNG is very well placed in this scenario andour call of the stock doubling over three years remains intact.
Meeting minutes with some midcap companies
Yes Bank (Yes IN–BUY) (Market Cap - US$3.4bn)Loan growth
∑ Expect loan growth of 20% YoY in FY15. Incremental lending to mid-corporate segment is slowing.
Deposit franchise
∑ Expect Casa ratio to improve to 26-27% during FY15 as bank iswitnessing healthy growth in savings accounts.
∑ Blended cost of savings accounts is slightly over 7% as bank offersdifferential interest rate on savings deposits to select customers.
Margins
∑ Expect margins to improve slightly in FY15.
Fee income
∑ Income from foreign exchange transactions dominates the fee fromfinancial markets.
∑ Lower activity in debt capital markets in impacting fee growth.
Operating costs
∑ Expect some operating efficiencies to flow through in FY15.
Asset quality
∑
Asset quality trends should improve and credit costs in FY15 to be lowerthan that in FY14.
Capital adequacy
No preferred mid cap pickin the sector; within large
∑ Current Tier I CAR is at 9.8% and bank can fund it growth of ~20%through internal accruals.
∑ Bank may look to raise capital in the coming 12 months and that willallow growing faster as well.
P I Industries (PIIND IN – NR) (Market Cap - US$660m)
∑ P I Industries has a unique model of in-licensing and co-marketing innovativeagri chemicals. The company has been reducing focus on generics that isdown to 25% of total revenues from 90% a couple of years ago.
∑ Within India, the company derives 55% revenues from insecticides and 25%from pesticides. Herbicide is a small component of revenues but is the fastestgrowing segment as labor is becoming expensive even in rural areas.
∑ Despite better seeds (namely Bt cotton), Agri chemical industry has grownfrom $500m in 2003 to $1.8bn in 2012.
∑ Strong order book on custom synthesis side (60% of total revenues) providescomfort on growth over next three years. Top five products contribute morethan half of custom synthesis revenues.
∑ The management expects 25%+ sales growth and stable margins in FY15.The stock trades at c. 18x FY15 consensus estimates.
∑ The company is expanding Jambusar facility and guides for capex of Rs3bnover FY15/16. From FY16 onwards it expects margin benefits as operatingleverage kicks in and additional tax benefits as the facility is in specialeconomic zone (SEZ).
UPL Limited (UPLL IN – NR) (Market Cap - US$2.2bn)
∑ UPL is a leading producer of crop protection, chemicals and seeds with 81% oftotal revenues from export markets and 19% from India.
∑ In India, the company continues to grow well on back of new productsintroductions and plans to launch 2-3 every year.
∑ It has nearly 10,000 distributors in India though is also exploring dedicatedretail outlets of its own and currently has 10 such outlets.
∑ The management expects c. 13-15% sales growth and 50-100bps marginexpansion in FY15. The stock trades at a reasonable valuation of c. 12x FY15consensus estimates. Due to wide spread geographical presence, UPL remainsinsulated from uncertainties related to weather in individual countries.
Coromandel International (CRIN IN – NR) (Market Cap - US$1.2bn)
∑ Coromandel is one of the largest private sector fertilizer companies and hasan emerging presence in specialty nutrients, crop protection and retail.
∑ The company expects fertilizer volumes to pick up in FY15/16 from a low basein FY14. High P&K prices and weakening rupee hurt volumes over last 1-2years. With both the trends reversing moderately, the management expectssome demand recovery.
∑ On pesticide segment, the management expects continued strongperformance though monsoon is a critical factor.
∑ Coromandel started its retail franchise, Mana Gromor Centres, in 2008. It hasnearly 650 outlets at present.
∑ The company spends c. Rs1m per store as capital expenditure with mostoutlets being on lease (10-years) and some critical ones being owned.
∑ The purpose of retail model was to eliminate dealer overcharging and ensuregood quality product to farmers.
∑ The company has seen same store sales growth of 15-20% in 400 stores.Some of the recent stores started over last two years are yet to ramp up interms of sales.
Ashoka Buildcon (ABSL IN – NR) (Market Cap - US$390m)
∑ Ashoka Buildcon (ABL) is the EPC arm of the Ashoka Group and is anexclusive EPC and O&M contractor of all projects of Ashoka ConcessionsLimited (ACL). Ashoka Concessions Limited is the BOT project developer forboth ABL and SBI Macquarie.
∑ ABL booked orders worth Rs22.9bn in FY14 of which Rs11.4bn was roadprojects and Rs11.5bn was Power T&D. Order backlog as of March’14 endstood at Rs35.5bn.
∑ ABL has a project portfolio of 10 BOT projects which are operational while ACLhas 3 operational projects and 4 projects under construction. EPC margin forthe company is ~13% for both the in-house and third party projects.
∑ The company expects 20-30 highway projects to be re-awarded by NHAI inFY15. According to the company the recent projects awards (BOT) by NHAIsaw lesser competition as number of players are struggling to get equity anddebt funding.
∑ The competition for NHAI’s EPC projects remains very aggressive. Thecompany has availed the NHAI scheme (proposed by C RangarajanCommittee) of premium postponement for two of its projects which will helpin near term cash flow requirements.
JK Lakshmi Cement (JKLC IN – NR) (Market Cap - US$362m)
∑ JK Lakshmi believes that the supply pressures are largely behind as most ofthe announced capacities have come on-stream in north/west.
∑ The company would be foraying into east during FY15 – there would be a fewplayers expanding, which may result in temporary pressures but structurally,east offers much higher potential due to lower demand base and resourceconstraints.
∑ The management expects a demand pick-up post elections with politicalstability, which would drive infra spending and private investments would alsopick up
∑ From a longer term perspective, the management believes that the entrybarriers are rising as the greenfield expansion takes 5-7 years and costs nowUS$130/t
∑ The management believes that the industry profitability has bottomed-out andwould improve ahead – of course, needs to be supported by demand
∑ On the cost side, the company expects moderate inflation for FY15
Dalmia Bharat Ltd (DBEL IN – NR) (Market Cap - US$452m)
∑ After hefty capacity adds in the past few years, the management believes thatthe expansions would moderate considerably over the next 2-3 years.
∑ From a longer term perspective too, the entry barriers have been rising as agreenfield cement capacity creation is becoming cumbersome and takes 5-6years.
∑ Post weak demand trend in the past few years, the management is hopeful ofa demand recovery in south India following the recent resolution of Telanganaissue as there would be financial package allotted to the new state which
would result in creation of infrastructure. The business confidence would alsobe back and the private investment should also start in the region
∑ Dalmia expects south utilisation rates to move up to ~65% from current~55%.
∑ Over the past few years, Dalmia has taken self-help measures to reducecosts.
∑ Despite high input cost inflation, the company has been able to marginallyreduce its variable costs over FY12-FY14, which is commendable
∑ As a result, Dalmia reported Rs730/t of Ebitda during 9mFY14 which washigher than the sector average and better than several of its southern peers
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