15 July 2020

Deccan Cements Stock Analysis

Deccan Cements was incorporated in 1979 and started commercial production in 1982. The company manufactures cement (portland, slag, etc.) and has a 2.25 MTPA capacity at Bhavanipuram in Telangana. The promoter of the company is Mr. M B Raju and the promoters own a 56.24% stake in the company.
The company caters to the Telangana, Andhra Pradesh markets primarily apart from the neighboring states of Karnataka, Chhatisgarh, etc.

The company's revenue and profit growth is volatile. Cement companies lack any pricing powers and need strong cost advantages to make profits.
Deccan Cements Fundamental Analysis
Financial Snapshot
  • FY20 saw a de-growth of 14.7% primarily because of a slowdown in infrastructure spending in Andhra Pradesh after the 2019 assembly elections
  • The capacity utilization in FY19 increased to 77% from 65% in FY18
  • The realisation per tonne fell to 3,702 in FY19 from 4,004 in FY18
  • The power and fuel cost made up ~ 35% of the revenues in FY19, this is up from an average of ~ 26% in the earlier years
  • The company has Rs 116 Crores worth of cash in books and a debt of Rs 87 Crores
  • The promoters have a high remuneration which is roughly at par with the ceiling. They take away 12% of the profits every year
  • Over the last 10 years, the company has repaid debt of Rs 279 Crores, undertaken capex of Rs 187 Crores and paid dividends of Rs 26 Crores
  • The dividend payout ratio is low ~ 10% of PAT
  • The company's Return on Equity is mostly below 15% p.a.
Deccan Cements Capacity Utilization
Capacity Utilization vs Realization per tonne
The capacity utilization has inched up since 2015 but the realization per tonne has come down during this time. This is indicative of a lack of pricing power, which is an industry wide phenomenon. For the Cement companies, the pricing varies from region to region. Deccan Cements is a regional player and is prone to higher cylicality in the cement prices. The company enjoys a strong supply of limestone from it's own mines in Telangana.

The company has an installed capacity of 2.25 MTPA and an enterprise value of 335 Crores. The EV/Tonne works out to 1,489 ($19.85). This is one of the cheapest valuations for a small cement company on the Indian bourses.
While EV/Tonne cannot be seen in isolation, it is a decent indicator of the bargain you are getting. Deccan Cements has usually traded at a EV/Tonne of  > $35. The stock trades at EV/EBITDA of ~ 4x. The market-cap to sales ratio is 0.65. The company had announced a Rs 600 Crore capex plan to increase capacity from 2.25 MTPA to 4 MTPA. 

Investment prospects
There are many long term factors which the investors have to keep in mind. DCL is a small regional player in Cements and the margins are prone to the volatility in the regional cement prices. The Management remuneration has stayed constant at 12% which is a significant percentage. The company has posted volume growth over the last 5 years but the realizations are only trending lower. Post COVID-19 scenario, recovery in the infrastructure segment might be slow due to the a shortage of labour.

Investing in Deccan Cements Ltd. would require active tracking and it is not a BUY and forget kind of a stock. We recommend you to study the company further and decide if the current discounted valuations give you any margin of safety.

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