N ano ivesh
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
Nano Nivesh Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Devang Bhatt devang.bhatt@icicisecurities.com 10,000 8,000 6,000 4,000 2,000 Buy Price 1065 Recommendation Buy Fair value 1400-1450 Price performance Key risks- Business specific 1,500 1,000 500 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
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 579.1 575.7 633.0 694.9 EBITDA 114.6 102.5 127.9 145.7 Net Profit 45.6 51.9 70.0 82.5 EPS ( /share) 65.1 74.1 100.0 117.9 Technical Chart (Monthly Bar chart) Short term consolidation likely amid secular Bull phase 310 772 Volume expansion during price rally 501 12 month EMA 1222 767 Stock data Market Capitalization ( crore) 745.5 52 Week High / Low ( ) 1220/564 Promoter Holding (%) 56.2 FII Holding (%) 1.1 DII Holding (%) 10.0 Dividend Yield (%) 0.9 12M / 6M stock return (%) 69/8 Debt ( crore) 106.1 Cash and Cash Equivalent ( crore) 27.5 Enterprise Value ( crore) 824.0 5 Year Revenue CAGR (%) (FY11-16) 11.3 5 Year EBITDA CAGR (%) (FY11-16) 12.2 5 Year PAT CAGR (%) (FY11-16) 85.9 Valuation FY16 FY17E FY18E FY19E P/E 16.4 14.4 10.6 9.0 Target P/E 22.3 19.6 14.5 12.3 EV / EBITDA 7.2 7.6 5.6 4.4 P/BV 2.7 2.2 1.9 1.6 RoNW 16.4 15.4 17.5 17.4 RoCE 24.5 20.0 24.2 24.0 RoIC 24.8 20.1 25.5 Source: ICICIdirect.com Research 29.0 Quarterly performance ( crore) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Sales 141.1 132.0 145.6 130.5 EBITDA 30.3 23.5 27.2 23.3 EBITDA Margin (%) 21.5 17.8 18.7 17.9 Depreciation 4.9 5.2 5.3 5.3 Interest 3.0 1.7 1.6 1.4 Other Income 0.8 0.9 0.3 0.2 PAT 10.0 11.4 13.5 11.0 EPS ( ) 14.2 16.2 19.2 15.7 Source: ICICIdirect.com Research Shareholding trend (%) Key Shareholders Q4FY16 Q1FY17 Q2FY17 Q3FY17 Promoter group 56.2 56.2 56.2 56.2 FII 0.0 0.0 0.0 1.1 DII 5.3 8.2 9.0 10.0 Non-institutional 38.4 35.5 34.8 32.8 Source: ICICIdirect.com Research Technical View The share price had a phenomenal run in 2014-16 as it rallied 8x from its March 2014 lows of 150 to hit a lifetime high of 1222 in November 2016. 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 900-950 region. Given the long term bullish price structure, declines towards support zone should be utilised as buying opportunity to ride eventual upside towards 1200. Source: Bloomberg, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 2
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 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cement capacity 111 122 137 138 139 144 144 145 150 Capacity Utitilisation 67 59 53 54 55 55 62 67 70 Dispatch 74 72 73 75 76 78 89 96 104 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
Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Total operating Income 579.1 575.7 633.0 694.9 Growth (%) 32.3-0.6 10.0 9.8 Raw material cost 49.5 50.6 53.3 56.0 Employee Expenses 21.8 20.1 20.5 22.6 Power, Oil & Fuel 147.9 148.5 162.0 172.8 Freight cost 123.8 129.6 135.0 150.1 Other Expenses 121.3 124.3 134.3 147.7 Total Operating Exp. 464.4 473.2 505.1 549.2 EBITDA 114.6 102.5 127.9 145.7 Growth (%) 77.5-10.6 24.8 13.9 Depreciation 20.3 21.1 22.5 23.6 Interest 15.2 5.3 2.7 2.7 Other Income 1.5 1.9 2.6 4.7 Exceptional items 0.0 0.0 0.0 0.0 PBT 80.6 78.0 105.3 124.1 Total Tax 35.0 26.1 35.3 41.6 PAT 45.6 51.9 70.0 82.5 Adjusted PAT 45.6 51.9 70.0 82.5 Growth (%) 129.2 13.8 35.0 17.9 EPS ( ) 65.1 74.1 100.0 117.9 Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax 45.6 51.9 70.0 82.5 Add: Depreciation 20.3 21.1 22.5 23.6 (Inc)/dec in Current Assets 53.2-20.2-10.1-10.9 Inc/(dec) in CL and Provisions 6.8-0.1 4.2 4.6 CF from operating activities 141.2 58.1 89.3 102.5 (Inc)/dec in differed tax liability 9.9 0.0 0.0 0.0 (Inc)/dec in Fixed Assets -7.6-11.0-15.0-20.0 Others 0.0-15.0-15.0-50.0 CF from investing activities 2.2-26.0-30.0-70.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Inc/(dec) in loan funds -115.0-35.0-35.0 0.0 Dividend paid & dividend tax -6.3-6.3-7.0-8.4 Interest paid -15.2-5.3-2.7-2.7 Others 1.9 11.9 0.0 0.0 CF from financing activities -134.7-34.7-44.7-11.1 Net Cash flow 8.7-2.6 14.6 21.4 Opening Cash 18.7 27.5 24.9 39.5 Closing Cash 27.5 24.9 39.5 60.9 Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital 7.0 7.0 7.0 7.0 Reserve and Surplus 271.6 329.1 392.1 466.3 Total Shareholders funds 278.6 336.1 399.1 473.3 Total Debt 106.1 71.1 36.1 36.1 Deferred Tax Liability 57.9 57.9 57.9 57.9 Other Non Current Liabilities 0.0 0.0 0.0 0.0 Total Liabilities 442.6 465.1 493.1 567.3 Assets Gross Block 571.7 596.7 621.7 646.7 Less: Acc Depreciation 229.5 250.6 273.1 296.7 Net Block 342.2 346.1 348.6 350.0 Capital WIP 34.0 20.0 10.0 5.0 Total Fixed Assets 376.3 366.1 358.6 355.0 Investments 0.1 15.1 30.1 80.1 Inventory 53.8 53.6 59.0 64.7 Debtors 8.2 23.7 26.0 28.6 Loans and Advances 18.0 23.0 25.3 27.8 Other Current Assets 1.4 1.2 1.3 1.4 Cash 27.5 24.9 39.5 60.9 Total Current Assets 108.8 126.3 151.1 183.4 Creditors 20.4 20.2 22.2 24.4 Other Current Liability 22.1 22.2 24.4 26.8 Total Current Liabilities 42.5 42.4 46.6 51.2 Net Current Assets 66.3 83.9 104.4 132.2 Application of Funds 442.6 465.1 493.1 567.3 Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) Adjusted EPS 65.1 74.1 100.0 117.9 Cash EPS 94.1 104.3 132.1 151.7 BV 397.8 480.2 570.2 676.1 DPS 9.0 9.0 10.0 12.0 Cash Per Share 39.2 35.5 56.4 87.0 Operating Ratios (%) EBITDA Margin 19.8 17.8 20.2 21.0 PAT Margin 7.9 9.0 11.1 11.9 Inventory days 33.9 34.0 34.0 34.0 Debtor days 5.1 15.0 15.0 15.0 Creditor days 12.8 12.8 12.8 12.8 Return Ratios (%) RoE 16.4 15.4 17.5 17.4 RoCE 24.5 20.0 24.2 24.0 RoIC 24.8 20.1 25.5 29.0 Valuation Ratios (x) P/E 16.4 14.4 10.6 9.0 EV / EBITDA 7.2 7.6 5.6 4.4 EV / Net Sales 1.4 1.3 1.1 0.9 Market Cap / Sales 1.3 1.3 1.2 1.1 Price to Book Value 2.7 2.2 1.9 1.6 Solvency Ratios Debt/EBITDA 0.9 0.7 0.3 0.2 Debt / Equity 0.4 0.2 0.1 0.1 Current Ratio 2.6 3.0 3.2 3.6 Quick Ratio 1.3 1.7 2.0 2.3 ICICI Securities Ltd Retail Equity Research Page 4
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 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 5
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