Buy Deccan Cements; target of Rs 670: Centrum
Centrum’s research report on Deccan Cements
We retain our Buy rating on Deccan Cements (DCL) with a revised TP of Rs670. DCL reported weak earnings growth in Q2Y18 (EBITDA/PAT down 23%/30% YoY) led by high cost inflation and flattish volume offtake. We continue to like DCL owing to 1) the improving demand outlook in the south, 2) DCL’s higher than peers profitability metrics, due to its unlevered balance sheet, low asset cost base (USD27/MT), and 3) strong free cash outlook (no capex in near term).
We continue to like DCL as AP/Telangana demand outlook remains strong and improvement in sand availability in Tamil Nadu will boost demand and pricing recovery. We also like DCL owing to its debt free balance sheet, and no capex requirement for next 2-3 years. These would lead to strong free cash flow. Further, its return ratios remain superior. Thus, we maintain BUY on DCL with a revised TP of Rs670 valuing it at 8.9% AOCF/EV yield on its FY15-19E average AOCF.
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