CYCLICALS-- When and Where to Bet?

Hi Abhishek,

Going by the updates and recent results, the cement sector is surely doing well. I have interest in two stocks - Anajani Portland & Kakatiya Cement…will like to know your views.

Being a cyclical & commodity nature, it becomes tough to take a call for me.

Great update Abhishek! Can you explain how the huge gap in topline/bottomline growth? How can one achieve 970% NP growth on 40% revenue increase? Is it a special case of cyclical turnaround + some other -ve factors of company turning positive - essentially a perfect alignment of all stars?

Most importantly, from a learning PoV, could this possibly have been identified by someone who studied it, or a one-off tukka?

Also, can you identify a few good North/South companies so we know if we’ve missed the first half then maybe some of us can inv. some amt in the south-based companies?

Other than JK what would be your next strong pick in this ? Thanks.

Ayush:Here’s a brief report on Anjani on some other blog that I’d read a few days back while googling cement stocks.

I am a CA and I work in the Financial Reporting Team of a large Cement Manufacturer (amongst the Top 5). As a valuation metric, we value a cement plant at close to $180/ton. So at $54 JK Lakshmi is a screaming buy !!

Non Stock related personal blog

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I haven’t run any valuation numbers for any of these companies. But general data that I had collected about 3-6 months back and a few questions follow -

a) Operating costs: Coal and freight costs constitute quite a chunk of operating costs. With the uptick in prices of domestic coal and more coal imports, along with a possibility of a diesel hike post UP elections, how far do you think this would impact the valuations? (Btw, freight costs for southern cement companies is higher due to comparitively lower consumption and higher supply. So, on what basis are we saying that the cement companies stock prices move up, starting with companies in the north?) (JK Lakshmi cement’s sales are primarily in the North and East).

b) In volume terms, the break up of cement demand across regions is something like this -

North - 17%

East - 17%

South - 31%

West - 19%

Center - 16%

c)Let’s look at the bare basics. Housing constitutes 60% of the demand for cement, while 20% each is shared between Infrastructure and Industrial consumption. I am not too sure if a lot of infrastructure is being built in the South (Andhra being the main culprit) and with South constituting the major volume %, how far is this sustainable? How many new housing projects are you seeing springing up in and around your areas?

d) Coming to price hikes, it has not been uniform across the country. North (Rs9/bag) & Central(Rs12/bag) region have had highest price hikes followed byEastern region (Rs7/bag). South remains flat (I checked with a shopkeeper beside my place). Prices in West too remain flat. In fact, Gujarat saw a price cut of Rs. 10-15/bag.

The avg. price per bag after the hike in each of the regions are -

North - Rs. 250/bag

Central - Rs. 239/bag

East - Rs. 251/bag

West - Rs. 236/bag

South - Rs. 282/bag

g) If I remember correctly, there has been significant capacity addition across players, and the utilization levels hovered between 70-80%. Can we see some link to the data where the report says ‘little or no capacity addition’?

h) ACC, Ambuja, Ultratech have a lot of exports as part of their revenue composition and from what I can see at a cursory glance at these companies’ numbers vis-a-vis their stock prices today, they seem to be overvalued.

i) EV/ton in cement companies depends on a whole host of factors, but primarily capex across the industry. As far as I can recollect, replacement cost in EV/ton terms was around $120 and not $180. Have we done/can we get a report where this EV/ton calculations were done for players in the industry to get a feel of under/over valuation?

d) How far do you think are we seeing these superior numbers due to a very low base effect of FY11? And how sustainable is this? I mean Mar 11 numbers look pretty ok to me. Does that mean Mar 12 numbers would disappoint us?

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I agree with Kiran to an extent. Based on his recommendation I went back and checked with my M&A team. Theyconfirmedthat the price of cement companies is ranging from$120/ton to $180 (depending on a host of factors).

JK Lakshmi is a south player, and south is where most of the pain is. But based on the price feelerswithinmy own company, the current prices are going to remain steady (neither going too up nor too down).)

However the threat ofCompetitionCommission restrictions is looming large. There had been regularinquiries (though they havent taken any action since the past 6 months now !!)

There is also going to be a bit of consolidation in the cement sector.

A source of comfort is the buy back of the promoters.

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Last I checked JK Lakshmi operated in North India & parts of West India. From co’s website: " JKL has a wide network of 70 cement dumps and over 2200 dealers spread across the states of Rajasthan, Gujarat, Delhi, Haryana, U.P., Uttaranchal, Punjab, J&K, Mumbai & Pune"

feelerswithinmy

There is a JK Cement (south player) and then there is a JK Lakshmi cement (north and east, sells to west also).

ek Lakshmi ne North ko South banaa diya :slight_smile:

A short report on the cement sector from Elara Capital (never heard of them :slight_smile: ) dated Feb 17. The capacity utilization across the industry is closer to 70-75% now, but the companies are able to increase prices. So, either there is cartelization or the demand is there on the ground.

**Growth momentum continues **

_Cement dispatches grow by 9.6% _

In January 2012, all-India cement dispatches (including ACC and Ambuja) reported an impressive YoY growth of 9.6%. For a third consecutive month, the industry has posted growth of more than 9% driven by strong demand in the western region. Even on MoM basis cement dispatches have improved by 3.2%. Apart from improvement in demand, impressive YoY growth was also attributed to lower base (last year dispatches grew by only 2.4% YoY). On YTD basis, (April-Janâ12) cement dispatches were up modestly by ~5.7%.

_UltraTech outperforms peers _

In January 2012, UltraTech reported an impressive growth of 11.2% YoY due to lower base. (Last year UltraTech dispatches had de-grown by 2%). However, Ambuja reported moderate growth of 4.1% while ACC reported growth of 8.8% YoY.

_Cement prices inch up in western, eastern and central regions _

Cement prices during the month increased by INR5-25/bag in the eastern, central and western regions and fell upto INR5/bag in the northern region. Prices in the southern region have shown a mix trend. Though prices in the trade segment have moved up by INR 5-10/bag, they have declined by similar magnitude in non-trade segment. In coming weeks, dealers are expecting prices to move up by ~INR10/bag in eastern and western regions.

_Recommendation and outlook _

With industry entering into busy season, we expect cement prices and demand to remain firm. Softening in petcoke prices and ocean freights is also likely to reduce cost pressure on cement companies. However, given the sharp run up in some of the frontline stocks we remain selectively optimistic on cement stocks. We like Grasim in large cap, Shree Cement in mid cap and JK Cement & JK Lakshmi in small cap due to attractive valuations, cost competency and healthy balance sheets.

@Ayush - I dont know anything about Anajani. But Kakatiya is not a pure cement player. They have a pretty significant sugar division and some presence in power. I don’t know anything about sugar – other than eating it, of course :slight_smile:

I don’t know how BHEL is categorised and I certainly don’t have much idea about its financials. But just looking at the chart, it’s available at prices well below Oct’08 panic crash prices!

What’s going on? Is there any particularly bad newsflow hitting it? Apart from scrapped tenders of Rajasthan power projects, I don’t see any major negative.

Solid blue-chip, very low debt, Net current assets > 10x debt,Available at PE ~9.

I am looking at purely as a black-box chart. Anyone wants to shed some light on this? The only negative from a TA pov is that 50dma has crossed under 200dma

Is it worth a quick 50-100% short-term bet?

Capital good company get its valuation by order book, for BHEL order book for FY2011-12 is not healthy…this is the one reason…there are many other reasons too like rupee devaluation causing high raw material input price ,steepcompetition from chinese companies.

Any views on BHEL? Purely from a P/E perspective the level it is at today (around 8 times) is a level last seen in 2001 as per the data I have. Incidentally, their financial profile has only got better since then. Pessimism abounds about BHEL. Its like a pariah nowadays. I hear people talking about order book reduction.

The figure given in this article of Rs. 1.22 lakh crore is still 2.5 times the FY12 sales. Fine, it has come down from a higher figure, but still what is wrong with 2.5 times?

In 2001, its EBITDA margin was around 8.7%. FY12 - it was 23.5%

In 2001, RoE was 8.4%, today it is 31%.

I am looking deeper into BHEL. I feel it might be a good play purely from P/E rebound perspective if you look at a 3-4 year holding period perspective. Analysts are saying SELL in hordes. We are not bound by institutional imperatives as retail investors.

Any views?

Hi Kunal,

The biggest drag here is imminent FPO. Government is lookingfor an opportunity to take money by selling the shares. The moment they will feel that there are enough buyers, a price will be announced, which will be much lower than current price. No one wants to be a party to that. I think one should wait out for the FPO to finish before entering.

How about Tata steel ? Another reknowned name that has been beaten down.

5 Yr earnings CAGR around 7%

PE - 6.6 , Price/book - 0.72 , Debt / equity <0.5

+Tata brand .

Once the steel demand revives, high chances of a turnaround

I read an interesting book by Parag Parikh. In that he explains how 5th and 10th ranking companies in an industry perform better on the Price chart than the 1st and 2nd. It is because their EPS growth appears much more to the investor !!

In that lighttime seems to be right to take positions in the sugar industry. I for one have my eyes glued on

1). Balarampur Chini. Purchase price 2008 low.

2). Bajaj Hind, very attractive price.

Of the two, from share price perspective Baja Hind is likely to give better returns. Its strong resistance is Rs.240 and 2012 low is Rs.18 that is 13x

Whereas for Balrampur key resistance, and my exit point is Rs.160 and 2012 low is 32; Only 5x. I think Mr.Parikh made a valid point.

PS:

Triveni Eng is a little confusing with Engn included (although they have demerged, but still) andRenuka listed only in 2006 too new and aggressive due to the acquisitions.

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why Renuka Sugar is out of discussion ?

Is any one following rail names? Say kalindee rail, texmaco and cimmco?

All rail names have halved or more than halved though it seems that the built-up order for the EPC pertaining to the freight corridor is going to start soon.

Regards

Do you track Titagarh Wagon too?

what do u guys think of Ratnamani metals and tubes it looks attractive at this price.

Was listening to Indusind concall yesterday. They have a CV portfolio of about 19% of their total book, and including small CV and utility vehicle loans, it is 27%.

They have seen a gradual increase in the NPAs in the CV portfolio from around 1% to 1.3%. However, they sounded positive on the future and expect these levels not to worsen by more than 5-10 basis points. Expected turnaround is 3-4 months after elections ie around Q2-FY15. However, in my view, the market may start discounting it earlier. They indicated that they are seeing some sign of month on month improvement in Dec, albeit it is only 1 month. Generally Q4 is a better period for this sector in their opinion.

If the financier is expecting a revival, the story could be better for end users. There are some CV players we could look at as turnaround plays.

Tata Motors - is the largest player. It is firing on all cylinders on the JLR side, with the outlook being generally positive for this part of the business. China, Europe, USA are expected to post better growth next year and the signs are visible with all the global auto majors posting better numbers last couple of quarters. Compared to this, the domestic CV business is a small part (currently 10-15%) and largely due to the local slowdown. This is a drag on the overall business. The profits, cash, return ratios etc of Tata Mot have been held up by the JLR numbers. The standalone financials (CV plus ancillary) is dismal. The co. appeared in the recent Motilal Oswal wealth creation study where the increase in the stock price relative to the increase in the net profits over the last 5 years has been very less.

Ashok Leyland - This is the 2nd largest CV player and is only into CVs. Owned by Hindujas. Exports are to developing nations currently (SAARC, Gulf, Africa etc). But this is entirely a domestic play. They have 50-50 JVs with Nissan and John Deere. Even during the slowdown they have been making investments in the business - in their above JVs and in their foundry subsidiary which supplies to them. They have a very strong rural distribution network especially in the South. They have been selling non core investments (eg in Indusind bank) to generate cash to reduce debt and increase core investments. They have posted very poor operating profits and net loss (excl. other income) in the last 2 quarters. Average utilisation is 20-30% and there is a fair level of operating leverage possible in case demand improves and production increases. It is available at 5000 cr market cap even after the current run up and looks to be the cheapest stock available. Another positive aspect in its favour is that the entire investment expert community is negative on it :slight_smile:

The third stock I have in view is Eicher Motors. While the bikes business is in the limelight, the CV portion is the real kicker in my view. They have 50-50 JV with Volvo and have also invested a lot in this notwithstanding the slowdown. Like Ashok Ley, they have also a slew of launches ready for the coming months. Volvo is planning to use this as their global souring hub for engines and parts, and thus Eicher, like Tata Mot, has an element of international recovery play going for it. Valuations look on the higher side though.

Would request knowledgeable boarders to post their comments on any investment candidates in their radar in this sector.

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