NCLI (Nagarjuna Cement Ltd) Initiating Coverage Research Report By Ventura

NCLI (Nagarjuna Cement Ltd Industries) has recently completed its capex in both its leading verticals of cement (0.7 MTPA) and particle boards (30,000 TPA). Post this the cement capacity stands elevated to 2.7 mtpa while the particle board capacity has expanded by 50% to 90,000 TPA. Further, the company plans to commission a MDF board plant with capacity of 1000 boards per day by Sept FY19. This plant is expected to breakeven by FY20 and will marginally dent overall EBITDA margins. On the back of the above we expect overall revenues to grow at a CAGR of 27.7% to Rs 1595.9 crores by FY20. EBITDA is expected to grow to Rs 250.9 crores (CAGR of 30.0%) over the same period. While margins of the cement business are expected to remain resilient, particle board margins are expected to taper given the impending competition. Despite this overall margins will improve by 79 bps to 15.7% by FY20.

The repayment of debt to the extent of Rs 150 crores (from the recently concluded QIP) will not only lead to de-leveraging the balance sheet but enable faster growth in PAT to Rs 151.8 crores (CAGR of 40.5%). We expect ROE to dip slightly to 14.1% over the period FY18-19 before clawing back to 20%plus levels by FY20. Over the same period ROCE is expected to improve by 249bps to 19.7%.

We are positive on the company given that:-

i. The cement industry is on the verge of a turn-around: South India has witnessed a five year lull in cement demand owing to surplus capacities & subdued demand. States with muted growth in the past such as Tamil Nadu and Karnataka are expected to witness some upward bias on the back of good rainfall recently. A major driver of cement demand in the south market is expected to be AP and Telangana markets led by low cost housing and irrigation projects.

ii. Spotting the above opportunity NCLI has expanded its clinker capacity from 1.60 MTPA to 2.60 MTPA and cement grinding capacity from 0.96 MTPA to 1.71 MTPA at Simhapuri, Suryapet District, Telangana. Post this the total cement capacity of NCLI will move up to 2.7 MTPA. The new capacity will be operational from Q4FY18.

iii. NCLI operates its business of Cement Particle boards under the brand name of Bison Panel. NCLI, has put up an additional capacity of 30,000 TPA to its existing capacity of 60,000 TPA after witnessing strong demand. Further, Bison Panel is one of the market leader in the particle board business and thereby enjoys high margins compared to its other businesses.

iv. NCLI has ordered equipment to commission a new MDF board plant which is used for making doors. The new segment will demand a capex of Rs 40 crores. NCLI expects to commission and make this plant operational by September 2019. The capacity will be able to produce 1000 boards per day.

v. We expect the stock of NCLI to get re-rated sharply given the improved visibility on revenue growth, profitability, future expansion plans and EBITDA/ton of cement division nearing Rs 1000/ton, We initiate coverage on NCLI as a BUY with a Price Objective of ₹ 564, representing a potential upside of 108% over a period of 24 months. We have arrived at our target price based on the SOTP value