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Strong prospects make Heidelberg stock a good bet

Heidelberg has doubled its capacity from 3 mtpa to 6 mtpa in recent years, despite the subdued demand for cement in the country.

, ET Bureau|
Updated: May 19, 2014, 10.29 AM IST
Heidelberg surprised the Street with its numbers for the first quarter of calendar year 2014, with an 8% year-on-year (y-o-y) increase in cement volume despite having sold the Raigad unit on 3 January. So, adjusted for this sale, its volume grew by 29% y-o-y.

The company’s earnings before interest, tax, depreciation and amortisation (EBITDA) also jumped by 84% y-o-y. Thanks to the capital gains from the Raigad unit sale, its net profit also zoomed to Rs 48 crore compared to a loss of Rs 66 crore during the corresponding period last year.

Heidelberg has doubled its capacity from 3 mtpa to 6 mtpa in recent years, despite the subdued demand for cement in the country, with a capital expenditure of Rs 1,570. This, along with high interest and depreciation, had put some stress on its profitability. However, the increased capacity utilisation is going to pay off in the coming years.

Strong prospects make Heidelberg stock a good betIn addition to this, the cost reduction measures will help the company in its efforts to increase the margin. For example, the Rs 200 crore conveyor belt programme between its limestone reserves and clinker units—the distance between the two units is 20 km and the company earlier used trucks to transport limestone—will result in cost savings of about Rs 50 per tonne.

The company is also planning to reduce its power costs by setting up a 13 MW heat recovery plant. The Rs 150 crore project is expected to be completed in 2016.

This counter is an ideal candidate for re-rating because there is clear visibility about growth from here on. Though Heidelberg is quoting at high valuations based on historical parameters, it is only because of very low profit.

According to the consensus estimates, the EBITDA and EPS of the company are expected to double in the next two years and this should bring down the valuations to reasonable levels. Though its debt is on the higher side at present at 1.2 times its net worth, the operational turnaround and strong promoter back-up (Heidelberg AG is the third largest cement producer in the world) should allay any concerns on that front.

he recent correction in the counter is also triggered by the resignation of its CEO Ashish Guha, who had been heading the company for the past eight years and will continue till September 2014, when his successor steps in his shoes. Since management changes are common in MNCs, there is no need to worry about it and you should use any fall in prices to buy the stock.

Selection methodology: We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last one month.

Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 strong buy, 4 buy, 3 hold, 2 sell and 1 strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock.

To ensure we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 100 table.

Strong prospects make Heidelberg stock a good bet

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