Upgrade India Cements to ‘neutral’ from ‘reduce’ ) and revise target price to Rs 88 per share (earlier Rs 98) after cutting our FY17f earnings by 13% and rolling forward our valuation base to end-Sept 2016 from end-March 2016. We revise our FY16f/17f cement ebitda by +4%/-13%.
We continue to value the standalone cement business at EV/ebitda of 6.0x, while we assign a slightly higher multiple of 6.5x to value the Trinetra Cement stake, given its capacity is better located in the northern region. At the current market price, the stock trades at more than a 50% discount to the replacement cost, which we believe will provide downside support.
Since we initiated coverage on Feb 3, 2015, India Cements shares are down 24% (versus MSCI India -8%), making it one of the worst-performing stocks in the sector. At one-year forward EV/Ebitda of 6.2x, the valuation of the cement business now looks inexpensive in relative to its average trading multiple since 2011 of 7.0x, on our estimates. Even the valuation discount to its mid-cap peers is close to its peak.
Further, the current discount of India Cements’ asset valuations to their replacement cost of 58% also offers some downside support to the stock price. From an earnings perspective, we believe India Cements stands to benefit more than its peers from the fall in international coal and retail diesel prices given its fuel/freight mix skew towards imported coal/road.
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