Broker's call: NCL Ind (Buy)

CMP: ₹131.25

Target: ₹185

Assisted by strong demand in AP/Telangana, NCL’s Q2 FY19 cement sales volumes grew 32 per cent y/y to 0.49 m tonnes. High power and fuel costs, stressed realisations and the rupee depreciation slashed its EBITDA/ tonne 48 per cent to ₹358. Management talked of 80 per cent cement capacity utilisation in FY19 and expected operating benefits from the higher axle-load capacity and pet-coke added to the fuel mix. With firm demand and more trade sales, we expect the division’s revenue to clock a 13 per cent CAGR over FY18-20.

In Q2, the company replaced its 15 per cent NCDs with a 10 per cent term loan. This would help reduce interest costs in coming quarters. Management said the MDF door capacity would be commissioned by end-FY19. With no major capex, we expect net D/E to shrink to 0.3x in FY20 (from 0.5x in FY18). Higher depreciation on the commissioning of the new plant and the subdued operating performance would result in PAT registering only a 17 per cent CAGR over FY18-20.

Valuation: We retain our Buy rating, at a target ₹185 on 6.5x FY20e EV/EBITDA.

Risks: Rise in input costs, demand slowdown.