Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities.
Deccan Cements (Q4FY20): Cost reduction initiatives near completion. Maintain BUY
(TP Rs 370, CMP Rs 265, MCap Rs 4 bn)
We maintain BUY on Deccan Cement (DECM) with a TP of Rs 370. Weak demand and volatile pricing in south pulled down DECM's profitability during both 4Q and FY20. However, DECM executed two major cost reduction infrastructures. It commissioned railway wagon and truck loaders in FY20 and its 6MW WHRS is also near completion. These will lower its material handling and power costs FY21 onwards, boosting margin.
4QFY20 hit on weak demand and pricing: Sales vol fell 14% YoY to 0.35mn MT, on weak regional demand and Covid lockdown. The co's NSR fell 1/7% QoQ/YoY as it could not capitalize on the regional price hike in AP/T. Lower input and freight costs moderated YoY inflation at 3% despite neg op lev. Unitary EBITDA halved YoY to Rs 327/MT on lower realization. Thus, rev/EBITDA/APAT in 4QFY20 fell 20/60/49% YoY to Rs 1,238/113/67mn resp.
FY20 performance also hit on poor sales: Weak demand throughout the year led to 16% vol decline YoY to 1.47mn MT. NSR recovered a modest 1% YoY. The benefits of lower fuel/diesel prices got offset on account of lower utilisation and opex rose 2% YoY. Unitary EBIDTA thus fell 3% YoY to Rs 533/MT. Lower sales pulled down FY20 revenue/EBITDA/APAT fell by 15/18/6% YoY resp to Rs 5,558/783/433mn. Lower capital charges moderated APAT fall.
Major cost reduction initiatives completed: During FY20, DECM commissioned truck loader and wagon loader facilities which will reduce material handling cost FY21 onwards. DECM's 6MW WHRS is almost ready and is expected to be operational by Aug'20 (delayed by 5 months due to Covid). This should reduce its power cost ~15-20% 2HFY21 onwards. The co spent ~Rs 970mn towards infrastructures in FY20. Owing to large capex despite weak earnings, net cash reduced to Rs138mn vs Rs 773mn YoY.
Maintain BUY: We estimate DECM to deliver 1% vol CAGR during FY20-22E on account of Covid impact in FY21E. WE estimate 15% vol decline in FY21E and factor in 20% recovery in FY22E on low base. Healthy pricing at start of FY21E and the opex reduction from commissioning of loaders and WHRS will aid margin recovery. These should drive 18% EBITDA CAGR in FY20-22E. We maintain BUY with unchanged TP of Rs 370/sh (5.7x its FY22E EBITDA, in-line its 10-yr mean multiple).
Shares of DECCAN CEMENTS LTD. was last trading in BSE at Rs.260.75 as compared to the previous close of Rs. 278.35. The total number of shares traded during the day was 15859 in over 860 trades.
The stock hit an intraday high of Rs. 288.9 and intraday low of 250. The net turnover during the day was Rs. 4347870.