Prime Stock Recommendation: Play the rising tide in this sector

1. 

   contactks

   September 14, 2023 at 7:01 am

   Hi Chandrachoodamani, Thanks for the recommendations. However, are the profitability parameters not impressive? The ROE is 4.73% and the ROCE is 1.93%. and its Asset Turnover ratios is 056. Is it only the Valuation bet? can you please clarify?
   1. 

      N V Chandrachoodamani

      September 14, 2023 at 12:20 pm

      Welcome your query sir,

      You are absolutely right about the parameters as is available in databases.

      There is a different way to look at these parameters in the case of a cement Co.

      Nuvoco is a new Co. and the fixed assets are at new cost. It also has intangible assets (goodwill) due to acquisitions and so the total value of assets appear optically higher, leading to lower asset turnover

      (Refer to key ratios – RoE, RoCE, Asset Turn – of FMCG major HUL in last 3 years post GSK acquisition to understand this impact)

      The other key factor that creates big difference in RoE and RoCE is DEPRECIATION.

      Compare Nuvoco with Ramco (almost similar capacity) and you will find that Nuvoco has almost 2X deprecation than Ramco or compare this depreciation figure of Nuvoco with that of other players taking into account of their cement capacity

      For a new Co, depreciation will be much higher than an old Co. as depreciation on plant is provided on a 10 year assumption (or 10% starting from year 1) while a cement plant runs for 30-40 years

      If you change that for calculation purpose and re-calculate RoCE and RoE, it will appear far superior than these headline numbers in databases

      Now consider FY24 and if the Co is generating good cashflows (as Nuvoco does), then in FY24 it will either reduce debt or re-invest in fresh capacity. So either the denominator (due to debt repayment) will boost RoCE or numerator will boost RoCE (due to re-investment generating more EBIDTA)

      So, looking at operating cash flow generation is also important.

      That’s why market values cement companies based on the EV/EBIDTA metric and not give much weight to RoCE and RoE

      So, it is better to compare valuation based on EV/EBIDTA and you will find that Nuvoco is attractively valued

      Further, this valuation metric also gives higher valuation to Cos with higher margins and capacity utilization (which in turn boost margins) as well. So, a headline comparison is also not appropriate.

      We think Nuvoco can further improve its margins while its capacity utilization is already quite good at ~79% and it deserves to be valued much better than what it is now

      Hence the call on the stock

      Hope this clarifies

      Thank you
2. 

   ellesh.bohra

   September 6, 2023 at 9:26 pm

   Why company is not paying dividends despite having good operating cash flows?
   Is that not a concern?
   1. 

      N V Chandrachoodamani

      September 6, 2023 at 9:36 pm

      Welcome your query sir,

      I don’t think this sector itself has that characteristic, barring ACC & Ambuja when MNC was their parent.
      It has been a re-investment led growth sector.

      On this particular Co, its first objective is to bring down debt further and then take up its two major capex initiatives.
      So, the cash flows will go towards these two purposes even in future.

      Concern for this Co mainly should be subdued demand plus subdued pricing environment which could put strain on cash flows and hence re-investment capability for growth. If these things happen together (as was the case in last 2-3 quarters), valuations may stay depressed.

      We think situation is getting favorable on all counts for this sector and hence this reco. at this point of time

      Hope this clarifies

      Thank you
3. 

   jame.sckel.l.e.y.9.23

   September 5, 2023 at 5:28 pm

   Damn already 5% from recom price, whene was it recommened?
4. 

   Vijay P

   September 5, 2023 at 5:06 pm

   Hi Chandrachoodamani,

   As there is already a cement company Dalmia Bharat in recommendation list , you have recommended to add another cement co? please provide allocation methods? shall i hold the existing one?

   Thanks, Vijay
   1. 

      N V Chandrachoodamani

      September 5, 2023 at 8:12 pm

      Welcome your query sir

      You are right that we have Dalmia in our reco.

      At that point of time, the scope for input cost recovery was there while the uncertainty w.r.t demand and pricing persisted.
      So, we preferred to play through a relatively safer stock, Dalmia, a net debt free Co.

      Now with demand and pricing also recovering, we think leveraged players like Nuvoco is also likely to do well. A favorable demand and pricing environment will help it improve its margins and cash flows and undertake expansion plans sooner than expected.

      Generally, leveraged Cos provide better returns to investors during a sector upturn (exactly opposite in down-turn)

      Btw, Nuvoco is also the fifth largest cement company, though heavily skewed to eastern region.

      Since Dalmia is also an eastern region focused player, any demand issue in that region can negatively impact both the stocks
      So, keep the overall allocation within the limits of your sector allocation for a commodity sector.

      We can’t do individual weight suggestions.

      Thank you

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