Making a case for Shree Digvijay Cement at the current Market Capitalisation of 1200 Crs.
Disclosure - Invested & Biased. Happy to learn about possible antitheses, loopholes, or any mistakes.
First reason to look: The Cement cycle is turning positive. Quite a few articles & good fund managers like Pankaj Tibrewal @ Ikigai have made a case for it Sign Up | LinkedIn
Shree Digvijay Cement is expanding its capacity from 1.5 million tons to 3 million tons by setting up a new cement grinding plant. It is now ready and currently undergoing trial runs, and is expected to launch cement from that plant very soon.
As per their media release yesterday, the performance during the quarter was impacted due to the lower-than-expected cement prices in Gujarat and subdued demand.
Cement demand is showing some improvement now, and it’s anticipated that prices will also move in tandem. This positive trend should lead to better realisation and profitability in the coming months.
So, at a broad level, the Industry is having tailwinds. Demand is improving along with better realisations (that is, higher Sales volume and higher EBITDA per ton = substantially higher EBITDA)
And the company’s expanded capacity (2x) is all set to come into production.
Of course, all of it has been known for a while. So, how much is priced in v/s how much value is still left on the table is one’s guess & would likely depend on how things progress.
Would greatly appreciate any feedback (esp negative). Thanks in advance.
Valuation difference is stark now. From 6 : 1 (ACC was ~2300, ~Ambuja 380) at the time of merger, now the ratio is under 3: 1 ( ACC 1800, Ambuja 600+) . If there is a merger - which looks imminent, ACC will definitely get some upside ( my estimate is that merger ratio will be 4.5:1 given their current and upcoming capacities). What am I missing?
The replacement cost of 3 Million Ton at USD100 per ton is about USD 300 million or INR 2500 crores approximately. The current EV of the company is Rs.1300 crores. The potential for the market cap to go up by Rs.1200 crores . There is potential in the Company. Disclosure: invested and views biased.
I’ll elaborate a bit more on Shree Digivijay Cement (for the benefit of a broader audience)
The company went through a management transition in 2018-19 with Mr Rajeev Nambiar joining as the CEO. Profits and the Stock have both done well since.
My base case scenario is that, as the industry tide turns, they’ll be able to make 100Cr+ EBITDA on the existing capacity (based on their historical trend)
And with the gradual ramp-up of the expanded capacity, they should be able to generate 200Cr EBITDA in 2 years. There will be a higher depreciation and some interest cost in the meantime.
Keeping the valuations steady at 10x EV/EBITDA, there is decent room for Margin of Safety along with a good upside potential, at the current Market valuations.
Replacement cost is not US$100/t but more like US$70/t. Small capacities will trade 7-8x EV/EBITDA at max. It will get sold at US$80-85/t valuation. Beyond this it is a value trap
U are missing Adani here. The timing for merger is uncertain and most probably will happen when the merger ratio is even worse. All major expansion and acquisitions are happening in Ambuja. To expect that ratio will be any better than current looks optimistic scenario. I think the ratio will be closer to 2.5:1 if the merger happens in next 2years
The current valuation is about USD54/t. Even if we consider the valuation of USD70/t as suggested by you still there is a good margin of safety. Disclosure: Invested and biased
True North Fund which is a PE is the promoter of Shree Digvijay Cements. They had invested about 5 years back. Now that the capacity expansion is getting completed, my belief is that they will try for an exit. This is my view and I may be completely wrong. If they try to exit, then the replacement cost will definitely get its importance. Disclosure: Invested and Biased. Not an advise to buy sell or hold.Not SEBI registered.
Agree. Also, when the cycle will turn is uncertain. Also, excess capacity may take valuations lower if they are not able to sell with the pricing. Moreover, a new plant takes approx a year to reach optimal capacity till then profitability will suffer. Till the new capacity shows up, I will avoid despite knowing everything. Atleast at present CMP Mr market thinks risk of above is high. I will wait and hope markets will provide better opportunity. Disclosure:- Tracking Shree Digvijay Cement
