NCL Industries Ltd - Initiating Coverage - Auctus Capital India

On a strong footing..

We initiate coverage on NCL Industries with a Buy rating and a one-year price target of Rs90, a 90% potential upside from the current level. NCL derives over 80% of its revenues from the cement business operating mainly in AP, south India with an installed capacity of 2mtpa, the rest of sales come from segments like cement particle board, prefab structures and hydel energy. Its cement business has delivered a strong average EBITDA per tonne of Rs 912 for the last 11 quarters (Rs 1,193 for 9MFY12). We believe the company's strong brand franchise and pricing power in North Coastal AP, above industry volume growth post expansion (26% for 9MFY12, 17% CAGR over FY12-14e) supported by robust pricing environment in south Indian cement market would enable NCL to post EBITDA per tonne Rs 1,000 going ahead. Given strengthening balance sheet, earnings CAGR of 20% over FY12-14e and an attractive valuations of 2.5x FY13e EV/EBITDA, we believe, NCL is an excellent investment opportunity. Our target price is based on cement business valuations of USD$45 per tonne which leave significant room for further upgrade.

Strong branded franchise lends premium pricing in coastal AP: NCL's flagship brand, Nagarjuna Cement commands a premium pricing even to the tier-1 players (like UltraTech) within its principal market of coastal AP. Besides brand, the premium is also a function of NCL's sales & product mix as over 80% is sold through non-trade channel. Front ended capacity to drive above industry volume growth, albeit on low base, Railway Siding to help reach new markets: NCL consistently delivered higher than industry volume growth over past 2 years (70%/26% in FY11/9MFY12) since the completion of its 1.4 mtpa brown field expansion in 2010). We expect this strong momentum to continue driven by its strong retail franchise; accordingly we project a volume growth of 17% CAGR over FY12-14E. The Railway siding at its Kondapally unit enhances NCL's ability to cater to other states and provides a hedge against price volatility in AP.

Robust pricing environment to offset energy cost push: Post oversupply scenario and sharp volatility in cement prices in South and particularly in AP during FY10 and FY11, Industry has moved to effective implementation of production and price discipline which has sustained for over a year now. With industry moving up the learning curve in production discipline, robust pricing environment will offset any likely energy cost push. Additionally, the company is planning to set up 30 MW captive power plant (could commission by FY15) to ensure uninterrupted power supply. We have not assumed investments for CPP in our model.

Valuation attractive deleveraging coupled with rerating leaves significant upside: The stock is currently trading at an EV/EBITDA of 2.5x and P/B of 0.6x FY13e. We believe, these valuations are attractive given a deleveraging play (net D/E to reduce 0.5x from 2.3x over FY11-FY14E) Any improvement in industry fundamentals backed by increased spending in Infrastructure over FY14 (which is very likely due to 2014 general elections) would lead to rerating of the cement space. Our Mar'13 target price of Rs 90 is based on SOTP valuations - cement business at EV/Tonne of US$ 45 (implied EV/EBITDA of 2.6x FY14e) and non-cement verticals at 3x EV/EBITDA. At our target price, the stock would trade at EV/EBITDA of 2.7x and P/B 0.9x FY14e.

Source : Equity Bulls

Keywords