The Hindu Business Line : Chettinad Cement: Buy

EXPOSURES may be considered in Chettinad Cement Corporation (Rs 263), as it appears to hold potential to provide gains linked to fundamentals; it is also a potential participant in the consolidation process over the long term.

Higher cement prices and growth rates in demand for cement compared to the past few years, rationalisation of sales tax, likely reduction in debt levels and the availability of capacity from a new cement unit are likely to ensure a robust trend in earnings.

The stock trades at a price-to-earnings multiple of about 12 times its likely FY 06 earnings and is attractively valued from a longer-term perspective, as the industry environment remains favourable.

Chettinad Cement has a capacity of 2.2 million tonnes and it could acquire the potential to operate at close to three mt over next year. Investments in the new capacity and silos that are underway, and a power facility commissioned in FY 05, could also improve the operating efficiency levels and lower tax outgo.

These are factors that make the company attractive to bigger players who may seek a footprint in the South. If such a situation materialises, the upside potential may be significant.

The healthy cash flows over the past couple of years — a trend that is likely to continue — could help Chettinad trim the debt burden, which is still at high levels.

It has managed to replace high-cost debt and this has had a beneficial impact on earnings.

The principal risk to our recommendation is the possibility of a sharp slide in cement prices and demand in Tamil Nadu and Kerala. Given the business environment, the odds of such a trend are low at least over next year.

When Dalmia Cement's new unit starts to operate at full capacity, there could be pressure on prices, which are however likely to settle at higher levels compared to the past. Buy the stock with a one-to-two year perspective.

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