HeidelbergCement India - Play on better priced Central India; initiate with BUY - ICICI Securities

HeidelbergCement India (HEIM), part of global major HeidelbergCement Group, is a play on fast growing, better priced and highly consolidated Central India. HEIM's recent debottlenecking by >15% to 6.26mnte provides volume growth visibility in near term; while it intends to scale up its size in the medium term along with parent company's support. HEIM enjoys industry-leading +20% return ratios, as its EBITDA/te more than doubled over the past four years to Rs1,122/te in FY20 led by +6% realisation CAGR. Given no major organic expansion plans over FY21-22E, net cash is likely to increase to Rs6.8bn by FY22E from the current Rs1.6bn. We initiate with a BUY rating and target price of Rs230/share (7xSep'22E EV/E).

- Recent de-bottlenecking provides volume visibility; scouting for acquisitions: HEIM has mining leases in Amreli, Gujarat for proposed greenfield expansion but environmental clearance and land acquisition could take a couple of years. Recent de-bottlenecking of grinding capacity by >15% provides near-term volume visibility. HEIM remains open for any acquisition, which could be funded via parent's support.

- Parent company support growth in India: Parent company HeidelbergCement Group (HCG) also owns 100% stake in unlisted 7.2mnte South-based Zuari Cement (ZC), besides owning 69.4% stake in HEIM. In the past, HCG had part-funded capex needs of both HEIM and ZC and seems willing to invest in high-growth markets like India. Likely relaxation of mining regulations in future coupled with some stake sale in the prospective merged entity could pave the way for merger of ZC with HEIM in India and could more than double HEIM's capacities. Both companies are currently managed under the common leadership of Mr Jamshed Naval Cooper, MD & CEO.

- Key beneficiary of strong demand growth in Central India: Low per capita cement consumption in Central India (at <200kgs) vs all India average (~250kgs) augurs well for strong growth opportunity over medium term. Better rural housing demand, higher government spends on low-cost housing and infrastructure coupled with elections in UP in early 2022 would drive strong demand growth. HEIM enjoys ~9% market share in Central India and is likely to be a key beneficiary.

- Prices have grown at 6% CAGR over FY16-20E in Central India post UTCEM's acquisition of JPA's assets. With >82% utilisation and higher consolidation (top six companies having 85% market share), prices are likely to remain firm. Given capacity constraint, HEIM is likely to focus more on realisation & improve profitability.

- HEIM enjoys best-in-class margins: HEIM sells 100% blended cement with 85% trade volumes. Increasing share of premium products, commissioning of 5MW solar plants, improving blending ratio and rationalising fixed costs still remains profitability levers for HEIM. We expect HEIM's EBITDA/te to increase to Rs1,246/te by FY23E and model 14% PAT CAGR over FY20-23E. Valuation at 5.5xFY22E EV/E is attractive, in our view.

Shares of HEIDELBERGCEMENT INDIA LTD. was last trading in BSE at Rs.180.6 as compared to the previous close of Rs. 178. The total number of shares traded during the day was 6335 in over 346 trades.

The stock hit an intraday high of Rs. 182.45 and intraday low of 178.1. The net turnover during the day was Rs. 1139603.

Source : Equity Bulls

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