PRISM CEMENT, one of the biggest gainers in the cement mid-cap space, has seen its share price grow almost 2.5 times in last three months to Rs 76.50 levels. While the optimism on cement demand growth led by expected revival in economy has been key trigger for this stellar performance, the company’s overall profitability too has seen a turnaround. Prism’s March quarter performance indicated a good rebound in its cement and TBK (Tile, Bath and Kitchen) segments. Reacting on the March’14 performance, analysts at Espirito Santo observed that company’s operational performance vindicates their expectation of a turnaround in cement and TBK operations.
Not surprisingly, top mutual funds are also showing interest in the company’s stock. Of late, Prism’s shares worth Rs 175 crore (about five% of market capitalisation) changed hands in block deals. While around half of the same were bought by HDFC Mutual Fund, the rest was acquired by Prism Trust which indicates promoter’s confidence in the company.
Prism Cement that derives around 39% of its revenues from cement business is seeing the segment’s profitability grow even as costs are on the rise. The benefits of higher pet coal usage, better power efficiencies, and higher fly ash usage have started percolating. This has boosted cement segments’ per tonne Ebitda in March’14 quarter to Rs 615 versus a loss Rs 53 in previous quarter (Rs 549 in the year ago quarter), say analysts at Motilal Oswal Securities.
On the other hand, TBK segment, which also contributes about 38% to revenues, had been feeling the heat due to higher fuel costs. However, better fuel efficiencies are now helping, thereby boost investor confidence. TBK segment’s volumes, too, are expected to grow at a faster pace as fuel cost economics was limiting growth earlier.
The Ready Mix Concrete segment, the only business that continues to lag, should show improvement once the demand picks up, say analysts. Overall, analysts expect the company to post earnings per share of Rs 5.1 in FY16 compared to a loss (Rs -1.9 per share) in FY14.
However, after a sharp run up in the share price investors need to be cautious on the valuations of cement stocks. Analysts at J P Morgan state that Indian cement stocks are now among the most expensive in the world on two-year forward earnings, even as the RoE (return on equity) profile is relatively weak compared to SE Asian companies.
Further, though some analysts have upgraded their target prices (Espirito Santo to Rs 80 and Motilal Oswal to Rs 67) for Prism Cement, the same shows limited upside for the stock. Additionally, with the monsoon season setting in, it is likely to impact cement demand and realisations. Hence, investors with a medium term perspective may wait for some correction to enter the stock.
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