Investment Rationale: Adj PAT (Rs cr)

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2 4 Recommendation CMP BUY Rs 92 Cementing the Turnaround NCL Industries Limited is a south based small cement company. The Target Price Rs 131 company operates through four related business divisions such as cement, cement boards, ready-mix-concrete and energy (hydro power) Sector Cement division. Its brand Nagarjuna enjoys a brand loyalty and a premium Stock Details BSE Code position in the region. NCL operates two cement plants, one at Telangana and another at Andhra Pradesh State with combine capacity of 1.95MT NSE Code NCLIND with cement contribution of 82% in the total sales. The company also has two hydro power plants situated in state of Andhra Pradesh and Bloomberg Code NCLI IN Karnataka with 7.5 MW and 8.25MW, respectively. Market Cap (Rs cr) 338 Free Float (%) wk HI/Lo (Rs) 113/30 Avg. volume BSE (Quarterly) 86,090 Face Value (Rs) 10 Dividend (FY 15) 0% Shares o/s (Cr) 3.67 Relative Performance 1Mth 3Mth 1Yr NCL -9.3% 57.7% 176.2% Sensex -7.9% -2.7% -4.5% Shareholding Pattern (%) 30 th June 15 Promoters Holding 50.4 Institutional (Incl. FII) 0.1 Corporate Bodies 7.3 Public & others 42.2 Varsha Bang Research Analyst varsha.bang@nirmalbang.com Year Net Sales (Rs cr) Growth (%) EBITDA (Rs cr) Investment Rationale: The Southern market will drive slow and steady growth with prices holding at high levels The southern markets, specifically in Telangana and Andhra Pradesh have seen a strong pricing discipline in last the 6-9 months. Stable prices in the southern markets and cost control have contributed to a better performance of NCL and helped it to turn the corner. Southern region, which had witnessed the highest capacity addition of around 125 MT in the last five years, will see a considerable slowdown in fresh capacity addition by only 6 MTPA to 7 MTPA in the next two years. Better utilization and realization through its product mix NCL has been in the cement market for nearly three decades and had established one of the largest networks of 1500 dealers to penetrate the southern region under the brand image of Nagarjuna. NCL is one of the few cement manufactures approved by Indian railway to produce and supply cement for railway sleepers. The company has added advantage of being one of the plants located just 40kms away to the proposed capital of Andhra Pradesh (Amaravati) and this will act as demand driver for the company. All in all, we feel NCL s volume growth can be higher than the regional growth in demand for cement segment. This will help the company to improve utilization of plant and result in higher profitability. Valuation At the current market price (CMP) of Rs 92, the stock is trading at 3.8x its FY16E EV/EBITDA. We value NCL s business at 5x FY16E EV/EBITDA and have arrived at a price target of Rs 131, implying an upside potential of 43% in a year. NCL looks like an attractive investment opportunity among small-cap stocks. We Initiate coverage on NCL Industries ltd with BUY Rating Margin (%) Adj PAT (Rs cr) Margin (%) EPS (Rs) PE (x) $EV/ton EV/EBITDA FY (3.0%) % (40.8) (10.0%) (11.7) (7.8) FY % % % FY16E % % % FY17E % % % P a g e

3 Company Snapshot Established in 1983 by first generation entrepreneur Late Mr. K Ramachandra Raju, NCL Industries Ltd (NCL) is a Hyderabad-based company with business interests in cement, particle board, ready mix concrete and hydro power. Currently, the business is being looked after by MR. K. Ravi, MD of the company. NCL operates two cement plants one each at Telangana and Andhra Pradesh State with a combined capacity of 1.95MT and contributes around 82% of total sales. The cement sold under the brand name Nagarjuna established a premium brand image in the coastal districts of Andhra Pradesh. The brand Nagarjuna enjoys a brand loyalty and a premium position in the region. The NCL Business Divisions Business Divisions Capacity Location Cement MTPA Nalgonda and Kondappalli Boards TPA Nalgonda and Paonta Sahib Ready mix Concrete NA Autonagar and Medak Hydro Plant MW Srisailam dam and Tungabhadra dam Source: Company, NB Research The company started as a single product company with mere capacity of 0.07MTPA, which gradually increased to 1.95 MTPA of cement. However, to diversify, NCL entered into the manufacture of high quality, affordable building materials. With cement boards and ready mix concrete, the company forward integrated into value added products. NCL has two small hydro power plants of 7.5MW and 8.25MW situated in state of Andhra Pradesh and Karnataka, respectively. After experiencing a particularly turbulent phase of almost three years from early 2012 till mid 2015 due to a host of external issues like political headwinds in Andhra Pradesh State and pricing pressure on the south region, the company started to fructify slowly. The company s balance sheet faced huge stress during the distressed phase and had to resort to CDR. 3 P a g e

4 Investment Rationale: The Southern market will drive slow and steady growth with prices holding at high levels Due to the cyclical nature of the cement industry, the cement prices have shown large fluctuations in the last couple of years, which has given enough of ache to the existing players in the southern region. The southern markets has witnessed a serious downturn in cement prices during FY12-15, due to overcapacity, weakness in demand, slow growth in economy, slowdown in the construction activity etc, which has impacting the demand for cement in southern markets. Apart from this due to higher supply of cement the price remain under pressure during the period. However, the above trend is changing as the cement prices have raised sharply in the southern region in the last 6-9 months. Stable Pricing continues.. The southern markets, specifically in Telangana and Andhra Pradesh have seen a strong pricing discipline in last the 6-9 months. Stable prices in the southern markets and cost control have contributed to a better performance of NCL and helped it to turn the corner. Exhibit 2: Cement Prices In The Southern Region Source: Company, NB Research The cement industry in the southern India is stable and steadily growing due to demand, supply and price stability. Southern region, which had witnessed the highest capacity addition of around 125 MT in the last five years, will see a considerable slowdown in fresh capacity addition by only 6 MTPA to 7 MTPA in the next two years. 4 P a g e

5 This is expected to improve cement capacity utilization in this region to 61% to 63% over the time frame of two years. The incremental demand and slowing new capacity additions have reduced the volatility in cement prices in southern markets. For, NCL industries, Q1FY16 were the second consecutive quarter of strong cement realization resulting in improvement in profitability. We expect the momentum to continue for the company on account of sustained volume growth, production discipline, and strong pricing. Better utilization and realization for NCL NCL has been a unique company among smaller cement plants. Right from its inception, the company was focused on establishing a premium image for its brand Nagarjuna cement. With an installed cement capacity of 1.95 MTPA, the company sells its cement under the brand name of Nagarjuna which has an established presence in coastal Andhra Pradesh and Telengana. Strategically located in the sound markets NCL has been in the cement market for nearly three decades and has established the network of 1,500 dealers to penetrate the southern region mainly Telangana and Andhra Pradesh under brand name Nagarjuna. Strong focus on developing the retail market will enable NCL to sustain volume growth with better realization as compared to other players in the southern region. The company is one of the few cement manufacturers approved by the Indian Railways to manufacture and supply special grade cement, as it requires enhanced quality and performance characteristics for the production of railway sleepers. Since last two years, railway had been holding back orders for new sleepers. But in the current year railways has started the process of tendering orders for new sleepers. The company is expecting good demand from this segment, which will help it to increase utilization more than its peers in the region. The company also has forward integration in the form of ready mix concrete and building materials such as laminated cement bonded particles, which helps NCL industries in better capacity utilization. The political turmoil in Andhra Pradesh has led to a sharp fall in infrastructure development in this region. However, signs of growth are slowly re-emerging following the bifurcation of the state and political stability, which is expected to revive economic activity in the region with a pick-up in demand for infrastructure from both the states. 5 P a g e

6 NCL has the added advantage of being one of the plants close to the proposed capital of Andhra Pradesh (Amaravati). The new capital will require a lot of infrastructure development, which can create additional demand for cement. One of NCL s plants is located just 40 km away from the proposed capital and will act as demand driver for the company. All in all, we feel NCL s volume growth can be higher than the regional growth in demand for cement. This will help the company to improve utilization of plant and result in higher profitability. Steady Performance of Cement board division NCL has a unique feature of being the producer of cement particle boards having a manufacturing plant in State of Telangana and Himachal Pradesh with install capacity of TPA. The plant was set up in a technical collaboration of Bioson Werke of Germany, the world leaders in particle board technology. To provide value addition, the company has developed a unique lamination process to laminate cement boards. Cement boards division is performing well and running at full capacity. The division was consistently making profit, even in the difficult time of company, which help it to realize higher value. Cement board Division FY12 FY13 FY14 FY15 Install Capacity (TTPA) Sales (TTPA) Capacity Utilization (%) 85.0% 85.3% 87.6% 95.0% Growth (%) 4.2% 0.3% 2.8% 8.4% Sales (Rs in Cr) Growth (%) 9.7% 14.7% 2.0% 19.0% EBIT EBIT Margin (%) 14.6% 15.2% 15.8% 16.3% Source: NB Research 6 P a g e

7 Q1FY16 Quarterly Result Review delivered strong performance in Q1FY16, net sales grew by 67.6% YoY to Rs crs due to higher realization that were up by 22.8% to Rs YoY (-1.1% QoQ). Total Sales volume has increased by 50% YoY (down 7.7% QoQ) to 0.3MT. The company realization for cement and cement board has improved, due to stable pricing disciple seen in the southern markets during the quarter. For, NCL industries, Q1FY16 were the second consecutive quarter of strong cement realization resulting in improvement in profitability. We expect the momentum to continue for the company on account of sustained volume growth, production discipline, and strong pricing. Quarterly Result (Rs in cr) Q1FY16 Q4FY15 QoQ Q1FY15 YOY Net Sales % % Operating Expenses % % EBITDA % (3.9) % EBITDA Margin Depreciation % % EBIT % (11.4) % Interest % % Other Income % % Exceptional Income % % PBT % (19.1) % Tax % % Tax Rate Reported PAT % (19.2) % PAT Margin No of Equity Shares EPS % (5.5) % CEPS % (3.4) % 7 P a g e

8 Financials: Estimated to register strong improvement going forward The company s net sales have grown at a 10.2% CAGR in the past five years. Given the improvement in prospects going forward, we estimate revenues to grow at a CAGR of 15.8% for FY15-17E and the PAT to grow at CAGR of 148% in the same period. EBITDA Margin has increased by 666 bps to 13.4% in FY15 and will likely to improve with higher price realization. The company s EBITDA/ton has showed a poor performance in FY14 due to weak pricing environment and political issues in Andhra Pradesh, we are expecting, the company EBITDA/ton is likely to improve from Rs. 452 in FY15 to Rs. 840 in FY16E at capacity utilization of 60% in FY16E. The ROE and ROCE, which had faced a severe hit during FY due to poor margin performance, will improve in the period FY15-17E. The table below delineates clearly the estimated improvement in the financial health of the company. Profit and Loss (Rs. Cr) FY14 FY15 FY16E FY17E EBITDA Margin (%) EBITDA/Ton (Cement) (13.4) PAT Margin (%) (10) EPS (11.7) ROCE(%) ROE (%) (28.5) D/E (x) Source: NB Research Risk Slow recovery in demand In the past, capacity additions have been uneven and therefore outpaced demand growth during the certain period. This has resulted overcapacity and depressed in realization. We see some positive improvement of cement demand and expect the same to improve steadily from 2HFY16E onwards, backed by the government s thrust on infrastructure and demand uptake in the state. Cement demand was also impacted by cut down in government spending, muted demand from real estate and construction projects and slow recovery in infrastructure spending. However, subdued demand will lead to impact on pricing and realization basis. Increased pricing pressure The performance of cement sector depends upon pricing movement to a large extent. We have factored in a 5% CAGR in average realization through FY15-FY17E. Lower-thanexpected increase will pose downside risk to our estimates. 8 P a g e

9 Attractive Valuation trades at 3.8x FY16E EV/EBITDA and $36.9 in FY16E EV/ton basis. The company s cement volumes are expected to grow at a CAGR of 10% during FY15-17E and utilization is likely to improve from 55% in FY15 to 67% in FY17E. Peer Comparison (FY16E) Cement realizations are expected to remain strong during the same period, driven by a pick-up in demand for new capital investment. This, along with the benefit of operating leverage, would help improve margins, going forward. NCL s presence in Telangana and Andhra Pradesh region with stable cement price, benefit of upcoming infrastructure in these region, higher capacity utilization, forward integration, etc, will help NCL to post strong financials in the coming period. Companies Capacity (MT) Mar Cap Net Debt EV $EV/Ton EBITDA EV/EBITDA Sagar Cement Mangalam Cement Source: NB Research, Bloomberg At the current market price (CMP) of Rs 92, the stock is trading at 3.8x its FY16E EV/EBITDA. We value NCL s business at 5x FY16E EV/EBITDA and have arrived at a price target of Rs 131, implying an upside potential of 43% in a year. NCL looks like an attractive investment opportunity among small-cap stocks. We Initiate coverage on NCL Industries Ltd with BUY Rating. 9 P a g e

10 Financials Profit and Loss (Rs. Cr) FY14 FY15 FY16E FY17E Balance Sheet (Rs. Cr) FY14 FY15 FY16E FY17E Net sales Share Capital % Growth -3.0% 30.6% 17.8% 13.9% Reserve & Surplus Operating Expenses Networth EBITDA Net deffered tax Liab EBITDA Margin 6.9% 13.1% 19.7% 20.6% Long term Borrowings Depn & Amort Long term Liabilities Other Income Long term Provision Interest Total Loans Exceptional item Trade payable PBT (37.7) Provisions Tax Current Liab Adj PAT (40.8) Short term Borr PAT Margin -10.0% 1.7% 8.4% 10.4% Other Long term Liab Shares o/s ( No.in Cr.) Current Maturities Adj EPS (11.7) Capital Deployed Cash EPS (2.9) Net Fixed Assets Qterly (Rs. Cr) Q2FY16 Q3FY15 Q4FY15 Q1FY16 Capital Work In progress Revenue Investments EBITDA Long term loans Depn & Amort Cash & Bank EBIT Inventories Interest Debtors Other Income Loans & Advances PBT Other Current assets Tax Capital Employed EO Cash Flow FY14 FY15 FY16E FY17E PAT PBT (37.7) EPS Add:Depreciation Performance Ratio FY14 FY15 FY16E FY17E Add:Interest EBITDA Margin (%) 6.9% 13.1% 19.7% 20.6% Less: Other Income (5.1) (4.9) (1.3) (1.4) PAT Margin (%) -10.0% 1.7% 8.4% 10.4% Change in WC (36.9) (31.4) ROE (%) (28.5) Tax (3.1) (3.4) (14.9) (21.1) ROCE (%) CF from Operations Sales Growth (%) (2.9) CAPEX (36.3) (2.4) (7.0) (7.0) PAT Growth (%) WIP Per Share Data FY14 FY15 FY16E FY17E Others Income BV Per Share CF from Investing (5.7) (5.6) Cash Per Share Change in equity capital Dividend Per Share Change in borrowings (9.9) (37.8) (30.7) (27.0) Valuation Ratio FY14 FY15 FY16E FY17E Interest paid (40.0) (37.1) (31.5) (27.0) Price Earnings (x) Others EV/EBITDA (x) CF from Financing (40.2) (71.4) (62.3) (54.0) EV/ton (Rs.) Net Chg in cash (0.1) $EV/ton Cash at beginning Price/BV (x) Cash at end Mkt cap/sales (x) Turnover Ratio (x) FY14 FY15 FY16E FY17E EV/Sales (x) Debtors Days Valuation Ratio FY14 FY15 FY16E FY17E Creditors Days D/E (x) Inventory Days Interest Coverage (X) Fixed Asset Turnover P a g e

11 Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. NBSPL is in the process of making an application with SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, NBSPL or its associates including its relatives/analyst hold beneficial ownership of more than 1% in the company covered by Analyst. NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. This document, at best, represents Analyst opinion and is meant for general information only. NBSPL, its directors, officers or employees shall not in any way be responsible for the contents stated herein. NBSPL expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e