I have been wanting to write this for a long time, finally got around to it thanks to a long weekend , most of which was dry !
Deccan Cements is one of the smaller cement companies in the south. What impressed me most about the company is the financially disciplined conservative management and the
Lets begin with the most basic facts
Started in 1979 by a technocrat MB Raju
The plant started productionin 1982 current capacity is 2.3 million tonne per annum
The plant is 165 km from Hyderabad and appx 175 km to Guntur district, where the new capital of Andhra Pradesh ( Amravati ) is going to come up
The plant manufactures a wide variety of cements, including specialty cements. The regular grades of cement manufactured include OPC 43, OPC 53, PPC and PSC. Specialty cements produced include S53 for railway applications, SRC (Sulphate Resistant Cement), Low Heat Cement, Low Alkali Cement etc. ( source : Co website )
One of the main inputs in the production of cement is limestone. Deccan’s own captive limestone mine, having abundant high quality limestone, is contiguous to the plant premises
The other main input is power. Here also the company is more or less self sufficient with a Captive Thermal Power Plant (15MW), Hydro-electric Power Plant (3.75MW) and Wind Mills (2.025MW) under its fold.
Equity is only 7 cr
10 paid up
56% with promoters
No pledge. No warrants outstanding. No equity overhang
CMP 445. Mcap 311 cr
Long term debt as on 31st March 2015 was 116 cr. Thus total EV = 427 cr. I am ignoring short term debt on books as current assets > current liabilities by 50 cr
Thus EV per tonne in USD for Deccan is = 427cr converted to $ divided by 2.3 million = 28$ per tonne, which is way off the rates at which integrated cement plants have been valued in the recent past ( JPsold its plants to Ultratech for 140$/tonne . Lafarge recently sold 5.15 mt plant to Birla Corp for 5000 cr at an implied value of 149$/tonne )
Q1 2105 operating profit was 28.73 cr as compared to 6.42 cr in the same quarter last year
Last year the company sold 1.07 mt of cement against an installed capacity of 2.3 mt, implying a capacity utilization of 46%.
Even at this level of under performance, the company made 89cr of operating profit for FY15.
The EBITDA per tonne comes to 830/- for last year. Cement prices have since then firmed up and now realizations are upwards of 1000 per tonne.
Q1 EPS is 19.88 ( not annualized )
Stock already owned by IL&FS trust (9.5%) and UTI Midcap (5%). Institutional ownership is up by 10% over the last 4 quarters
Sagar cements releases monthly sales figures for themselves . Sales are up 18% yoy with accelerated growth in recent months. EBITDA per tonne is also up. Should apply to Deccan also.
what i like about the company
To the best of my knowledge , the company has not diluted the equity since its listing
Company increased its capacity from .3 mtpa to 2.3 mtpa without raising capital. It was funded from internal accruals as well as debt.
company has no capex planned in the near future
company generated 408cr as cash flow from operations between FY2010 to FY2015. This needs to be seen in the backdrop of the downturn of Andhra fortunes after the demise of YSR Reddy in 2009. Also, the subsequent Telangana issue has hampered growth in Deccan’s key markets
Out of 408 cr CFO, the company repaid loans worth 359 cr ! ( gives comfort on realness of the number )
By FY16 , the company is expected to be debt free.
The operations seem to be very efficient in terms of wage cost. Comparison of peer companies is as follows
Company name Wage %
Sagar Cements 4.56%
Deccan Cements 3.01%
The executive directors take the minimum wages as per the companies act ( source page 41, FY15 AR )
Company will benefit from its proximity to both Amravati and Hyderabad.
Construction of the capital will lead to a multi year boom for cement companies operating in the region. Search 'Amravati Andhra Pradesh Capital ’ on google images to see the image of the proposed city.
Valuation for FY19
Investment has to be made with a 3 year horizon
I am assuming capacity utilization will hit 80%
Sagar cements in their latest concall have indicated an EBITDA figure of 1500 per tonne in AP already. I am assuming it at 1200 per tonne in 2019
Debt will be zero.
Tax rate will be 25%
The number can look something like this
Total capacity : 2.3 mtpa
Capacity Utilization : 80%
Total sales : 18.40 mt
EBITDA per ton : 1200
Total EBITDA in lacs : 22080
Less Dep in lacs : - 2000
Less Tax in lacs: -5020
PAT in lacs : 15060
number of Shares in lacs : 70
EPS : 215
Given the potential for development in the region, capacity utilization of 80% seems reasonable.
Also, the company would have close to 400 cr of cash generated from FY16/17/18 operations. I also believe with no impending capex / loan repayments, the company may aggressively step up its dividend payout or go in for buybacks.
Sometimes , a boring companies in a boring business can generate a lot of wealth. I believe Deccan at this juncture merits closer viewing.
Mcap when posted : 311 cr
Disclosure : invested at these levels