CMP: ₹204.8
Heidelberg Cements (HCIL), erstwhile Mysore Cements set up by Birla group in 1958 is now a subsidiary of Heidelberg AG, the world’s third largest cement manufacturer. The company manufactures portland cement brand through its three plants located at Ammasandra, Karnataka (0.6 TPA), Damoh, Madhya Pradesh (2.1 TPA) and Jhansi, Uttar Pradesh (2.7 TPA). The company also caters to Bangalore, Mumbai and Pune apart from MP and UP. The company has a total installed capacity of 5.4 TPA.
Heidelberg cement (HCIL) reported a weak set of numbers for 3QFY22 as a two-fold blow of sharp cost inflation & subdued demand descended the overall performance. The unfavourable weather conditions, festive season & state elections in key operating regions translated into lower demand.
HCIL has built a niche market under its operating regions via strong brand building, premiumization & cost effectiveness. Higher trade sales & green power usage offers a competitive advantage, yet the limited capacity expansion caps the growth prospects.
The proposed Gujarat expansion will allow HCIL to enter newer markets. Although the cost headwinds are anticipated to persist in near term the improved demand are likely to offer opportunities for price hikes, thereby, offsetting the effects of cost inflation.
HCIL is undergoing de-bottlenecking which would result in capacity addition of ~0.5mtpa. The company is in the process of obtaining environmental clearances for its green field plant at Gujarat (to be commissioned in next 3 years) with capex starting in FY23.
With the introduction of FY24 estimates, we retain our Outperformer rating on the stock with a revised price target of ₹240 (earlier target: ₹267), valuing it at 7.7x FY23Dec EV/EBITDA.
Risks: Elevated RM prices; lower capacity utilisation & costlier inorganic growth than expectation.