Deccan Cement : Dull company.Dull business.Big wealth creation opportunity

Hi Alekh,

At a high level, ultimately everybody is trying to come at a decision whether to buy a particular stock or not. But as I said in my post above that it is a mixture of all the factors and not just EV/Tonne or EV/EBITDA in isolation and hence wouldn’t say what is a good EV/EBITDA or EV/Tonne.

For e.g. EV/Tonne of $25 or $30/tonne is very cheap but if there is huge oversupply due to massive existing capacities and there is no visibility of demand improving for another 2 odd years or more then buying this cheap also may not help as opportunity cost lost would be a lot, etc,. (I think you get the point )

That said, I personally feel that Deccan and NCL are still not expensive and decently priced (don’t want to use enticing adjectives ), as at a high level, even if I take today’s mkt cap of approx 500 Crs. for Deccan and their FY15 debt of 159 Crs and Cash balance of 26 Crs. then their EV works out to be (500+159-26) = 633 Crs.

Deccan’s capacity is 2.2 m tonnes. Therefore EV/Tonne will be (633 Crs/2.2m tonnes) = Rs 2877. Therefore in $ terms at exchange rate of Rs. 66 per $ this would work out to be $ 44.

Which ($ 44) I don’t think is expensive for a company:

1. Which has demand visibility in the region ( demand due to constructions due to Andhra/Telangana state formations, govt. spending on infra will start showing at ground level as well; Not much real estate demand but if that picks up then wud be more better).

2. Doesn’t have major capacity additions coming up in the region.

3. Has seen cement prices being stable or going up in the region (http://www.deccanchronicle.com/151123/nation-current-affairs/article/cement-price-rs-70-bag). Note: I personally take such news paper articles with pinch of salt and better way is to verify the cement prices (or trends) on the ground as it is not much difficult to do so.

4. Has seen margins expanding.

5. Has been consistently reducing debt.

But if one says that in the light of all positive factors $ 44 is cheap then what is it cheap in comparison to? Obviously it is cheap in comparison to replacement cost per tonne which maybe around $ 120 -130/ tonne. But personally for small cement players to be on the safe side I would compare it with say $ 80-90 per tonne.

At a personal level there are many things which one considers to decide when to sell etc, which is difficult to put here. Say for example I am saying and feel that it is not expensive and decently priced but as a DISCLOSURE – I sold 1/3rd of my holdings in NCL today at 160+, the reason was not that I feel it is expensive but sold it ‘coz wanted to top slice my portfolio, as I had bought NCL at lower levels and it had reached 15% of my portfolio and I wouldn’t be comfortable with a small cement company becoming 15% of my portfolio.
Also at the same time I would like to remain in Cement as a sector right now (if I continue to feel favourable and improving demand scenario), but at a certain point I will move from NCL to a bigger cement player (say India cements with 15+ m tonnes of capacity). Buying NCL (or a view on Deccan etc), was a decision I took ‘coz I felt that undervaluation was a lot in these companies with certain factors improving (as stated above. Please note that I might have missed stating few other factors that I might have considered for e.g. technically also I felt stocks had bottomed out and most of the selling had been absorbed or EBITDA/tonne & EV/EBITDA or receivables cycle & working capital cycle, etc,. hence don’t consider the factors I stated as the sole basis for my decision making as I might have missed more than few).

Hence, in short, one needs to take his own call depending upon individual’s thought process.

Also please note that I think there is a risk of some kind of government action trying to reign in cement prices. Please be cautious of this factor apart from associated risk factors as these are cement companies with very small capacities.

Disclaimer – I am a novice & an amateur investor, hence please discount/ignore my views. Above are just my views and not a buy/sell recommendation. The calculations/numbers etc, are back of the envelope calculations and hence can be way off the mark as compared to actuals; therefore please do your own due diligence.