3 Small And Midcap Cement Company Stocks To Buy For Good Returns

Birla Corp: Favorably diversified mid-cap

The brokerage has set a price target of Rs 1,825 on the stock of Birla Corp.

According to Emkay Global, Birla's profitability or EBITDA per ton has almost tripled to Rs988/ton (FY21) in the past five years.

"We expect it to grow further, owing to cost optimization, de-risking efforts and product premiumization. The company expects a 30% capacity growth to 20mt by early FY23, which will likely drive its volumes at a CAGR of 8.5% (in line with the industry) over FY21-24E; further, Birla's aim to achieve a 30mt capacity by FY27E should dispel concerns about long-term growth, in our view. Strong cash-flow generation is likely to deleverage the B/S, while the upcoming expansion is unlikely to strain financial performance. Notably, after seven years of sub-par profitability, RoIC should regain double-digit from FY24E. Our target price implies a 1-year forward EV/EBITDA of 9.5x (17% above the T5Y average). Our Dec'22 target price of Rs1,825 is DCF-driven. We assume a sustainable i.e. terminal FCFF growth of 8.0% post FY26E, and sustainable incremental RoIC of 14%.

Sagar Cement: Looking beyond South (Buy; target price of Rs360)

According to Emkay Global Sagar Cement is likely to register industry-leading volume growth (~20% CAGR over FY21-24E), owing to a low base, a cyclical volume upturn and capacity expansion.

Sagar's primary market is in South market-its earnings subject to greater volatility; nonetheless, regional diversification in the East and Central markets via the commissioning of 2.5mt capacity in Q3FY22 should help to de-risk its business.

"We expect net debt-to-EBITDA to decline to 1.0x by FY24E (from 1.7x in FY22E), which would also suitably prepare the B/S for the next phase of expansion, from 8.3mt capacity (by Dec'21E) to 10mt by FY25E as per management guidance. More importantly, after eight years of subpar profitability, Sagar is also set to show structural improvement with RoIC surpassing the cost of capital almost after a decade. Our TP implies a 1-year forward EV/E of 8.5x (10% above to the T3Y average). Our Dec'22 TP of Rs360 is DCF-driven. We assume a sustainable or terminal FCFF growth of 8.0% post FY26E, and a sustainable incremental RoIC of 14%," the brokerage has said.

Star Cement: Northeastern star (Buy; target price Rs130)

With a total cement capacity of 5.7mt, Star Cement has a 23% market share in the fast-growing Northeast region (NER). The company is likely to maintain its dominance, thanks to its established presence, strong brand recall and the absence of new significant capacity addition by others. The company recently commissioned a 2mt capacity at Siliguri (WB), which should boost volume growth over the medium term, while its upcoming clinker capacity of 3mt plus grinding capacity of 4mt by FY26E (management guidance) should support long-term growth. Company's net cash position and its RoICs sustaining well above the cost of capital provide additional comfort.

"Our Dec'22 target price of Rs130 is DCF-driven and implies a target multiple of 9.5x EV/EBITDA (7% below to the T5Y average). We assume sustainable/terminal FCFF growth of 8.0% after FY26E, and a sustainable incremental RoIC of 18.0% (vs. average of 16.5% in FY16-21 and 18.8% in FY21-26E)," the brokerage has said.

Disclaimer

The above stocks are picked from the brokerage report of Emkay Global. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.