Macquire Research on Indian prospects

Macquire Research on Indian prospects
Published: 19 April 2006

Rakesh Arora of Macquire Research Equities, India says that cement supply will not come in for the next two-three years, which may result in cement prices going further up. Based on profitability, Arora picks up two stocks, Grasim Industries and UltraTech Cement, which are bound to gain from the cement price hikes which are happening. He gives his views on the cement space.

On cement prices, we are quite sure that supply will not come in for the next two-three years, so it boils down to cement demand basically. If cement demand is going to remain beyond 8-9 per cent, then definitely prices will remain at the current levels or may even go up further and these valuations can then be justified.

India’s northern region, which was the first to break-even in terms of demand and supply, was the first to get off the blocks. But of late, western and central region both have caught up. Central region is now the biggest gainer in terms of percentage price increase. Meanwhile the eastern region and southern region have lagged behind. We are now seeing some price momentum gaining in the eastern region. For April, we have seen almost Rs 5-Rs10 per bag increase in the Eastern region. In south though, price increase was happening in bits and parts. Andhra Pradesh notably has done quite well, increasing from Rs 120 per bag to around Rs 150-Rs 160 at the current level.

 However, I think the companies are still waiting for elections to get over in Tamil Nadu and Kerala before the next round of hikes happen. Fortunately, monsoon in Tamil Nadu strikes later than the other parts of southern India. So we will be able to have a price increase in May in the southern part.

What you are looking at is huge cash flows, which is happening over the next two-three years and the best way to capture is DCF. Though people tend to EV/EBIITDA and EV/tonne, but one must take into account that you need three-four years to put up a new plant and you are just entering a cyclical upturn. So naturally you have to add back the cash flows for the next three-four years to arrive at EV/tonne for where this company should trade and today most of the companies are trading between US$170-180 per tonne.

I feel it is justified, says Rakesh Arora, because of the cyclical upturn and the cash flows that these companies will be able to make before new plants can come in. Valuations look a bit on the higher side on EV/EBITDA and price earnings multiples, but that is expected because the growth, which is coming in price earnings, is huge. Gujarat Ambuja declared 100 per cent higher net profits and same was the case with ACC.