Key risks to investing in Nano stocks

Transcription

1 N ano ivesh

2 Nano Nivesh Key risks to investing in Nano stocks September 14, 2012 Nano stocks may not be in the limelight and inherently being micro cap in nature will have a high risk return profile We advise clients to be disciplined in investing at all times. Allocate only a small proportion of your investible income to these stocks and diversify well Try to diversify your exposure within the Nano stocks as well by investing equal proportions in several picks These stocks may have low volumes and trade infrequently Micro cap stocks the world over are, to a large extent, affected by the Pump and Dump phenomenon of inflated price buying and depressed price selling As explained above, the clients should be patient and trade only through limit orders on any side of the trade. The risk of volatility remains in such micro cap stocks as they can move up or down with large buy/sell orders The fair value of Nano stocks are subject to expected growth potential in the future. Though due diligence has been done to a fair extent, the actualisation of growth still has a degree of uncertainty attached to it Nano stocks report tries to highlight companies with good and scaleable business models, dependable management and sound financials. However, these stocks may not be in the limelight and have a high risk high return potential. Please watch out for the following factors before investing in these stocks: Allocate a small proportion of your investible income to these stocks and diversify well. If you choose to invest in these stocks, most of your assets allocated towards equity should remain in more stable investments like stocks of large companies. Moreover, try to diversify your exposure within the nano stocks as well by investing equal proportions in several picks. This will help you avoid losing too much of your total wealth if the investments do not turn out well. When you invest in micro-cap stocks there is a higher risk of impairment. These stocks may have low volumes and trade infrequently. This can create a situation in which you may not be able to find any willing buyers for your stocks when you wish to sell. We advise our clients to be patient and trade only though limit orders to avoid volatile fluctuations, both while putting a buy and sell order in these stocks. ICICI Securities Ltd Retail Equity Research

3 Nano Nivesh Research Analyst Rashesh Shah Devang Bhatt 10,000 8,000 6,000 4,000 2,000 Buy Price 1065 Recommendation Buy Fair value Price performance Key risks- Business specific 1,500 1, Feb-14 Oct-14 May-15 Dec-15 Aug-16 Mar-17 Price (R.H.S) Nifty (L.H.S) 0 March 28, 2017 Deccan Cements (DECCEM) Deccan Cements (DCL) is a 30 year old cement brand in South and has an installed capacity of 2.3 MT. The company s plant is located in Nalgonda (Telangana) and sells cement in Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. Focus on high realisation markets and captive power plants have enabled DCL to register healthy margins. With the demand revival in the south, improving pricing scenario and operating leverage benefit, we expect sales and EBITDA to grow at a CAGR of 9.9% and 19.2%, respectively in FY17E-19E. Highlights Well poised to ride uptick in demand: Post bifurcation of Andhra Pradesh, the southern region has seen a healthy improvement in demand (up 4% in FY16, 14% in 9MFY17) mainly led by higher government spend from AP and Telangana (substantiated by 3x increase in ordering activities in FY16). Going forward, we expect cement demand in AP & Telangana region to further improve mainly led by infrastructure projects like Polavaram project ( 36,000 crore project) and Telangana housing scheme (2,70,000 2BHK houses). Further, Andhra Pradesh government has proposed to invest 32,000 crore to develop its new capital Amaravathi. We believe all cement companies in the vicinity of AP & Telangana will be a direct beneficiary of increased demand (CAGR of 8.0% in next two to three years). Further, slow pace of capacity addition (~6 MT) and increased demand (~25 MT) are expected to positively impact utilisation Prudent cash management, healthy realisation, operating leverage to drive growth: Despite downturn in FY10-15, the company was able to reduce its D/E from 2.0x in FY10 to 0.4 in FY16 mainly led by better cash management. Going forward, DCL is expected to prudently utilise cash flow by incurring minimal capex and expand post two to three years. Further, as demand improves we expect the company to register 19.2% CAGR growth in EBITDA in FY17E-19E mainly led by healthy realisation and operating leverage benefit. The incremental cashflow generated from higher profitability may be used for expansion post two or three years or healthy dividend payout Improving macros, attractive valuations: With the recovery in south region coupled with capacity expansion, we expect sales and EBITDA to grow at a CAGR of 9.9% and 19.2%, respectively, in FY17E-19E. DCL is currently trading at an EV/EBITDA of 6x in FY18E and 4x in FY19E. With anticipated improvement in financial performance, we have assigned an EV/EBITDA multiple of 6-6.3x in FY19E, arriving at a target price of 1,400-1,450/share Weak production discipline: While the south market, as a whole, appears fragmented, the fragmentation is more in AP/Telangana, where a large number of producers and sellers are present. However, the leveraged position of most sellers in AP/Telangana has led to supply discipline in the region. This production discipline has led to a sharp rise in price. Going forward, cement prices are expected to be driven by production discipline. As a result, weak production discipline would adversely impact south based cement players. Company specific Conservative approach in expansion/cost pressure: DCL has not expanded its capacity since FY10. While this has worked in its favour, we believe that with the pick-up in demand, a conservative approach in expansion may lead to loss of market share for the company. Further, the company s cost of production has increased at a CAGR of 8.6% over FY11-16 mainly led by higher power and freight cost. While DCL has been able to offset the same with 8.8% CAGR in realisation, any inability to pass on the higher cost (led by weak pricing discipline) may adversely impact the company s financials. ICICI Securities Ltd Retail Equity Research

4 Description Deccan Cements (DCL) was promoted and incorporated as a public limited company in 1979 by MB Raju, who is also its current executive chairman. The company s plant is located in Nalgonda district of Telangana with an installed clinker capacity of 1.8 MT and cement capacity of 2.25 MT. DCL is largely a retail focused cement player and sells cement under the brand name Deccan Cement in AP/Telangana (48.0%), Karnataka (16.0%), Tamil Nadu (17.0%) and Kerala & Maharashtra (17.0%). The cement plant is self-sufficient in power with a captive thermal power plant (15 MW commissioned in 2009), hydroelectric power plant (3.75 MW commissioned in April 1996) and windmills (2.0 MW) under its fold. DCL has a network of 1,000 plus dealers across all southern states as well as Maharashtra and Odisha. In FY16, cement contributed 98.5% of overall revenues while the rest of the revenues (1.5%) were generated from sale of power. History and track record DCL was established in 1979 and commenced commercial production in 1982 as a mini cement plant with an installed capacity of 0.06 MT Over the years, DCL has been implementing technology upgradation and expansion schemes to benefit from economies of scale. As a result, it has gained significant prominence in southern regions and increased its capacity by 38x to 2.25 MT DCL has sufficient limestone reserves for the next 50 years. Its limestone mines are spread across 600 acres in close proximity to the plant. Its license has been renewed in September 2014 for 30 years The company has an FSA with Singareni Collieries, located about 270 km from the plant, which can meet up to 90% of its total coal requirement. DCL also purchases imported coal and increases or reduces domestic coal and imported coal mix based on their prices Apart from DCL, the management has significant influence over DCL Exim Pvt Ltd, Satyasai Investments and Leasing Ltd, Melville Finvest Ltd and DCL Information Technologies Ltd Earnings estimates crore FY16 FY17E FY18E FY19E Net Sales EBITDA Net Profit EPS ( /share) Technical Chart (Monthly Bar chart) Short term consolidation likely amid secular Bull phase Volume expansion during price rally month EMA Stock data Market Capitalization ( crore) Week High / Low ( ) 1220/564 Promoter Holding (%) 56.2 FII Holding (%) 1.1 DII Holding (%) 10.0 Dividend Yield (%) M / 6M stock return (%) 69/8 Debt ( crore) Cash and Cash Equivalent ( crore) 27.5 Enterprise Value ( crore) Year Revenue CAGR (%) (FY11-16) Year EBITDA CAGR (%) (FY11-16) Year PAT CAGR (%) (FY11-16) 85.9 Valuation FY16 FY17E FY18E FY19E P/E Target P/E EV / EBITDA P/BV RoNW RoCE RoIC Source: ICICIdirect.com Research 29.0 Quarterly performance ( crore) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Sales EBITDA EBITDA Margin (%) Depreciation Interest Other Income PAT EPS ( ) Source: ICICIdirect.com Research Shareholding trend (%) Key Shareholders Q4FY16 Q1FY17 Q2FY17 Q3FY17 Promoter group FII DII Non-institutional Source: ICICIdirect.com Research Technical View The share price had a phenomenal run in as it rallied 8x from its March 2014 lows of 150 to hit a lifetime high of 1222 in November The sharp correction off November peak indicates the onset of the medium term consolidation phase for the stock, which will help to work out overbought conditions developed on the price front by the multi-fold rally. The correction is anchored around the key support of 770 as it is the value of rising 12-month EMA, which has always acted as a support over the past three years and swing high of January 2016 While the long term price structure stays intact, we believe the stock will remain in consolidation for a few months with strong support placed in the region. Given the long term bullish price structure, declines towards support zone should be utilised as buying opportunity to ride eventual upside towards Source: Bloomberg, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 2

5 What s the story? Strong up-tick in demand expected in company s key markets Post bifurcation of AP, the southern region has witnessed a healthy improvement in demand (up 4% in FY16 and 14% in 9MFY17) mainly led by higher government spend from AP and Telangana (substantiated by 3x increase in ordering activities in FY16). Going forward, we expect cement demand in the AP & Telangana region to further improve mainly led by infrastructure projects like Polavaram project ( 36,000 crore project) irrigation projects and Telangana housing scheme (2,70,000 2BHK houses). Further, the Andhra Pradesh government has proposed to invest 32,000 crore to develop its new capital Amaravathi. We believe all cement companies within the vicinity of AP & Telangana will be a direct beneficiary of the increased demand (CAGR of 8.0% over the next two or three years). Slow pace of capacity addition in southern region to boost utilisation! New capacity expansion in the southern region during FY13-16 slowed down to 7 MT vs. about 37 MT in the preceding three years. Going forward, we expect capacity expansion to further slow down to ~6 MT in FY17E-19E. Hence, supply pressure from new players/capacity should remain low. Further, with improvement in demand led by infra projects and individual house builders we expect demand (~25 MT) to outpace supply (~6 MT) positively impacting utilisation levels. We expect utilisation to improve from 62% in FY17E to 70% in FY19E thereby positively impacting margins led by operating leverage benefits. Exhibit 1: Demand supply trend Cement capacity Capacity Utitilisation Dispatch Growth -3% 2% 2% 1% 4% 14% 8% 8% Improved profitability due to proximity to key infra project! DCL s cement plant is in close proximity to Amaravathi and other upcoming projects (irrigation projects), which would make the company a key beneficiary of cement demand emerging from the region. Further, due to close proximity, DCL would enjoy the benefit of lower lead distance resulting in higher profitability. Higher realisation in company s key markets and cost efficiency enable Deccan to post better margins DCL enjoys better pricing in its key markets for its products compared to its other smaller comparable peers. As a result of healthy pricing and better cost management (lower employee cost led by higher contracted employee and lower power cost), DCL has been able to maintain healthy profitability over the years. In the worst year of FY14, in the southern region where most comparable players reported insignificant EBITDA margins (close to zero), Deccan was able to not only maintain its margins but also expand its margins from 13.0% in FY13 to 15.0% in FY14 mainly due to healthy realisation. Going forward, as demand improves, we expect the company to register 19.2% CAGR in EBITDA in FY17E-19E mainly led by healthy realisation and operating leverage benefit. Conservative approach yields better returns during downturn During FY10-15, the southern markets witnessed a downturn. However, despite this weak demand, DCL was able to make profit at the net level. Further, the cash flow generated in FY10-15 was efficiently utilised to pay off debt instead of incurring capex. This has helped the company to reduce its D/E from 2.0x in FY10 to 0.4x in FY16. Currently operating at 59%, DCL would wait for another two or three years before its next round of capex. We believe the incremental cash generated may be used for further cost rationalisation, expansion post two or three years or healthy dividend payout. ICICI Securities Ltd Retail Equity Research Page 3

6 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Total operating Income Growth (%) Raw material cost Employee Expenses Power, Oil & Fuel Freight cost Other Expenses Total Operating Exp EBITDA Growth (%) Depreciation Interest Other Income Exceptional items PBT Total Tax PAT Adjusted PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in differed tax liability (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Interest paid Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Other Non Current Liabilities Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Other Current Liability Total Current Liabilities Net Current Assets Application of Funds Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) Adjusted EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 4

7 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 5

8 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. It is confirmed that Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. ICICI Securities Ltd Retail Equity Research Page 6