20130912-Maybank_KERPL-Prism_Cement_17页_325kb

Prism Cement Summary

Core Content

Prism Cement (PRSC) is India's largest building material company, with a significant market presence in cement, ready-mix concrete (RMC), and ceramic tiles. The company is promoted by the Rajan Raheja Family, holding a 75% stake. PRSC's stock has been heavily impacted by two consecutive years of net losses, but the report suggests a potential turnaround beginning in the second half of FY14.

Key Points

Stock Information

• Ticker: PRSC IN
• Shares Issued: 50 million
• Market Cap: US$ 0.24 billion
• 6-mth Avg Daily Volume: US$ 0.1 billion
• SENSEX: 19,997
• Free Float: 25%
• Current Share Price: Rs31
• Target Price: Rs41 (new)
• Valuation: Sum-of-the-parts valuation at Rs86/sh
• Recommendation: BUY
• Target Price Justification: Based on a 10x PER for FY15F

Major Shareholders

• Rajan Raheja Family: 75.0%

Financial Forecasts (FY14F and FY15F)

• Revenue: Expected to rise from Rs50.3bn to Rs54.8bn
• EBITDA: Forecasted to increase from Rs3.5bn to Rs5.5bn
• Recurring Net Profit: From Rs360m to Rs2,052m
• EPS: From Rs0.7 to Rs4.1
• EPS Growth: 470% for FY15F

Business Segments

• Cement: Accounts for 39% of revenue, with expected volume growth of 11% to 5.3mt in FY14 and 7.5% to 5.5mt in FY15
• Tiles: 38% of revenue, with EBITDA margin expected to improve from 5% to 7% in FY15F
• RMC: 23% of revenue, with revenue forecasted to increase from Rs11.3bn to Rs12.4bn in FY15F

Cost Structure

• Cement: RM (17%), power and fuel (36%), freight (18%)
• Tiles: Power and fuel, RM, and freight account for 75% of costs
• RMC: 70% of costs are from cement, with other RM (sand and aggregates) forming the rest

Cost Savings

• Captive Coal Mining: Expected to reduce coal costs by Rs130/ton, saving Rs750m in FY15
• New Blending Silo: Expected to save Rs100/ton in production costs, improving EBIDTA
• EBIDTA Improvement: From Rs350/ton in FY13 to Rs500/ton in FY15F

Debt and Leverage

• D/E Ratio: Currently at 1.3x, expected to reduce to 1x by FY15F
• Debt Repayment Strategy: Sale of surplus investments and internal cash flow
• Interest Cost: Expected to reduce significantly in FY15F due to debt repayment

Valuation

• PER (FY15F): 7x, considered undervalued given the expected turnaround
• EV/EBIDTA (FY14F): 8.1x, compares favorably with peers
• EV/EBIDTA (FY15F): 5.3x, lower than FY14F
• P/BV: 1x
• ROE (FY15F): Expected to reach 14.6%
• Sum-of-the-Parts Valuation: Rs86/sh, with current market value at Rs43.3bn

Earnings Outlook

• Turnaround: Expected to start in 2HFY14 with improved EBITDA and EPS
• EBIDTA Growth: +23% in FY14, +53% in FY15
• EPS Growth: +470% in FY15F
• Risk Factors: Failure to achieve cost savings or sell surplus investments

Main Viewpoints

• PRSC is currently undervalued and offers a compelling buy opportunity due to its strong promoter base and potential for turnaround.
• The cement business is expected to drive near-term growth, while the tiles and RMC segments will support medium-term recovery.
• The company is restructuring its costs and operations, with significant savings expected from captive coal and new blending silo.
• PRSC's debt levels are high, but the company is on track to reduce leverage through internal cash flow and investment sales.
• The stock is trading at a PER of 7x FY15F, which is seen as a deep discount to its fair value of Rs86/sh.

Key Information

• Cement Business:

  • Capacity: 5.6mt
  • Expected EBITDA margin: 500 Rs/ton in FY15F
  • Revenue forecast: Rs19.8bn (FY14F), Rs21.3bn (FY15F)
  • Strong focus on affordable housing and infrastructure

• Tiles Business (HRJ):

  • India's largest and oldest ceramic tile producer
  • Expected EBITDA margin: 7% in FY15F
  • Revenue forecast: Rs19.2bn (FY14F), Rs21.1bn (FY15F)
  • Market share: 21%

• RMC Business:

  • Third largest RMC producer in India
  • Expected revenue growth to Rs12.4bn in FY15F
  • Operating margin expected to improve from 4.4% to 6.5%

• Investments:

  • 74% stake in QBE general insurance business
  • 30% stake in Norcross Plc (UK-based bath fittings)
  • Joint ventures with regional tile manufacturers
  • Total investments: Rs3.78bn

• Valuation Metrics:

  • PER (FY15F): 7x
  • EV/EBIDTA (FY15F): 5.3x
  • P/BV: 1x
  • ROE (FY15F): 14.6%

Conclusion

PRSC is positioned for a strong recovery in earnings and a reduction in leverage, with the potential to achieve a fair value of Rs86/sh. The company's diversified business segments, cost restructuring, and strategic investments make it an attractive BUY opportunity. The report highlights that the current low valuation presents a good entry point for investors.