Buy This Small-Cap Cement Stock For Target Price Of 210, Stock Likely To Gain 12% In 12 Months: Axis Direct

Axis Direct, a leading brokerage firm, in its recent report on Heidelberg Cement India Ltd (Heidelberg Cement) has recommended 'buy' the stock of the company for a target price of Rs 210 apiece. According to the brokerage's estimated target price, if the stock of the company is purchased at the current market price, the stock could give potential gains of 12% in 12 months. Heidelberg Cement India Ltd. is a small cap Cement Sector company having a market capitalization of Rs 4,251.26 crore.

Stock Outlook & Returns

The current market price of stock is Rs 187.70 apiece at the time of writing, down 0.42%. It was opened at Rs 189.40 apiece. The 52 week low of the stock is 164 apiece recorded on 20 June 2022 and the 52 week high is Rs 277.95 apiece recorded on 16 September 2021, respectively.

Returns on investments

The stock over the past 1 week has given a negative return of 5.03%, whereas, gained roughly 0.16% in the past 1 month. In the past 3 months, it surged 2.34%. Over the past 1 year the stock has fallen 28.74%. In the past 3 years, the stock has given a negative return of 3.17%. In the past 5 years, the stock gave a positive return of 51.09%.

Robust revenue growth

The company recorded revenue of Rs 2,297 Cr in FY22, registering an encouraging growth of 8.5% YoY. However, it reported a lower EBITDA/tonne of Rs 910 against Rs 1,129 in FY21 due to higher energy costs during the year, which was up 24% on a tonne basis YoY.

Improving leverage ratios led by a reduction in gross debt

The company reduced its gross long-term debt to Rs 175 Cr in FY22 from Rs 295 Cr in FY21 by repaying debenture worth Rs 120 Cr. Consequently, its Debt/Equity ratio declined to 0.12 in FY22 from 0.20 in FY21.

Increasing use of green energy

The company's utilization of green energy in the overall power consumption increased marginally to 23% in FY22 from 22% in FY21 and touched the highest level of 27% in Q4FY22. The company aims to achieve 35-40% of Green Energy use in total power consumption by FY25E.

 

Excellent traction in premium product Mycem

Premium product Mycem Power continued to receive excellent traction in FY22 as its sales increased by 14% to 0.80 mtpa from 0.70 mtpa in FY21. Premium products now account for 1/4th of the company's total sales in the trade segment (80% of total sales).

 

Elevated costs impacted profitability

In FY22, the company's profitability de-grew by 20% as elevated costs impacted its operating performance during the year. However, its interest costs declined by 28% YoY owing to the repayment of debentures during the year.

 

Further strides in sustainability objectives

In sync with its sustainability objectives, the company introduced AF (Alternative Fuel) in Narsingarh Line 3 starting with the consumption of biomasses from surrounding regions. The company aims to achieve a TSR (Thermal Substitution Rate) of 15%-25% via alternative fuel depending upon the fuel quality.

 

Key Competitive Strengths

a) Production of 100% blended cement.

b) Higher percentage of trade sales.

c) Strong positioning in the Central India region.

d) Strong parentage of Heidelberg Cement Group.

e) Robust financial position.

f) Extensive sales & distribution network in its operating regions.

Strategies Implemented during the year

a) Renegotiated existing contracts.

b) Bundling contracts for additional discounts.

c) Higher Use of digital marketing platforms.

d) Expanded annual service contracts.

e) Focused on trade segment, branding and building trust.

f) Improved customer relationship through data-driven insights.

 

Key Growth Drivers

a) Growth in Housing & Real Estate.

b) Industrial Development.

c) Promoting Public Infrastructure.

 

Key Focus Areas Moving Forward

a) Continue to undertake cost optimization initiatives.

b) Focus on augmenting sustainable production.

c) Focus on Customer Centricity.

d) Digitisation.

e) Augmenting efficient logistics.

Outlook

FY22 turned out to be a challenging year on the operational front owing to higher costs despite higher volume/revenue/realization growth YoY as overall cost increased by 9% on a tonne basis. While the company's focus on increasing the use of green energy bodes well from a cost optimization perspective, the absence of any major capacity expansion for the next three years may result in subdued volume growth as other players continue to expand.

 

Resilient Performance Amidst Challenges, buy for Rs 210 target price

The company is strongly positioned in its demand-accretive Central India. Moreover, its unwavering focus on selling premium cement and robust net-debt free balance sheet are expected to support the company's revenue and profitability growth moving forward. It also offers a healthy dividend yield of 5% at the CMP. We estimate Heidelberg to report Revenue/EBITDA/APAT CAGR of 11%/11%/15% from FY22-FY24E, driven by volume growth of 5% CAGR during the period. The stock is currently trading at 9.5x FY23E and 7x FY24E EV/EBITDA and we maintain a positive outlook on the company's long-term growth. "We value the company at 8x FY24 EV/EBITDA to arrive at a Target Price of Rs 210/share, implying an upside of 10% from the CMP. Hence, we change our rating from HOLD to BUY on the stock," the brokerage has said.

 

Disclaimer

The stock has been picked from the brokerage report of Axis Direct. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.