Sunday, January 17, 2010

Stock Idea: Andhra Cement

We like Andhra Cement because of the capacity expansion, which is going in the company. This is a GP Goenka group company, which has got two cement plants with a total capacity of 1.4 million tonne per annum. In FY09, this company achieved a sales of close to Rs 370 crore, profit after tax (PAT) was about Rs 60 crore, which results in an EPS of about 4.5. At the current price of about Rs 28, stock is traded at a price to earning multiple of about 7.
Now this company is undertaking a capacity expansion, which will take its capacity from 1.4 to 3.5 million tonne per annum. The increased capacity is going onstream in the next couple of days – maybe next week as what GP Goenka mentioned in a recent interview with CNBC-TV18.
So you have a company which is available at a price to earning multiple of about 7 on the old capacity and with the new capacity going onstream next week, which is going to potentially add the turnover by 2.5 times since the capacity is going up from 1.4 to 3.5 million tonne per annum, I think at the current market cap of about Rs 350 crore and the current P/E of 7, the stock is undervalued.
Another thing is that promoters have been increasing their stake in the company through market purchases and there has been a lot of inter state transfer between the promoters also. So promoters also realize the potential of the company and heartening fact is that the promoter’s stake in the company is close to 75%. So over the next few years, there is potential for dilution.
I see Andhra Cement is one of those candidates where potentially since there is a lot of interest in the cement companies from foreign players, there could be some kind of a strategic investor coming into the company or maybe some majority stake being given to some potential investor. Andhra Cement maybe a fit case where those possibilities exist.
Fundamentally, also at a price to earnings multiple of 7 on 1.4 million tonne capacity, of course, earnings are going to grow up when the expanded capacity goes on-stream. So at Rs 28 again, this is a market where midcaps and smallcaps have run away quite a bit.
To look for a safe stock in this kind of a market is slightly difficult. Andhra Cement at Rs 28 looks to be a stock where the downside looks restricted even if the market falls. And since the earnings are going to rise in the coming years, there is scope for significant appreciation from these levels.
Source: Internet (moneycontrol.com by Ashish Chug)

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