Deutsche Bank has come out with an insightful report on the Cement sector. It argues that the Cement story is pretty much intact, and the better days (in terms of profits and profitability) are still to be seen. It has forecast the cement party to continue till FY10.
The DB report is bullish on major cement companies like ACC, GACL, Grasim, India Cements, Ultratech Cement, and Shree Cement and has put out price targets that 20-39 per cent above the current levels.
I had invested in a company called - JK Lakshmi Cement back in March at around Rs.120 per share. The stock has since moved to Rs.132, a modest gain of 10%. However, I think there is a lot of steam left in this stock.
It is among the cheapest cement stocks with a price-to-earnings ratio of less than five times. It reported an EPS of Rs.32 per share for the year ended Mar'07. One of the plausible reasons why this company is trading at such ridiculously cheap levels could be its high leverage. I think it has Debt-to-equity ratio of over 2.5 times. Nevertheless, consider the following positives:
> the company recently expanded its capacity, thus growth in profits to not only come from higher prices but also from higher volumes
> the company is setting up a captive power plant, 36MW, which will pull down power costs that account for a third of cement companies operational costs...and maybe more in some cases..
Now, the DB report values the much larger and leaner cement companies at a P/E of around 14 times, discounting their FY09 earnings.
Even if JK Lakshmi Cements were to be valued at half that rate, ie. at 7 times. The target price of the scrip would be around Rs.210, a good 60% above its CMP of Rs.132. That on the basis of its current 12-month trailing EPS.
If the same is assumed to grow at around 30% over the next two years, which the DB report does given its price outlook, the EPS at the end of FY09 could be close to Rs.50 per share. A multiple of 7 times on the FY09 EPS would take the price target to Rs.350 per share, compared to its CMP of Rs.132.
Counter points / Contradictions ??