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Thursday, September 10, 2009

Deccan Cements Ltd:One of the better bets in the cement sector

Scripscan:Deccan Cements Ltd

Story:The boom in the cement industry, thanks to rural demand and government-funded projects, has provided an opportunity for small players to aggressively ramp up their production capacities. Take for instance, the Hyderabad-based Deccan Cements, which is promoted by M B Raju of the Nagarjuna group. The company had a capacity of nearly 8 lakh tonnes at the end of FY 2009. It has used the boom to more-than-double its capacity to nearly 1.8 million tonnes.The expanded capacity, which has been commissioned recently, will enable the company to expand its geographical spread and make it one of the key players in the Andhra Pradesh (AP) market.Incidentally, AP is one of the largest cement markets in India. It accounted for total cement consumption of nearly 18 million tonnes in FY09, accounting for nearly 10% of the total cement consumption in the country.The AP state-based cement makers reported 22%growth in cement dispatches in FY 2009, compared to all-India growth of 8% y-o-y during the period. At prevailing cement prices, the expanded capacity will add nearly Rs 350 crore to Deccan Cements? topline on an annualised basis. In FY10, however, the topline gains would be restricted to around Rs 200 crore.Deccan Cement has expanded capacity at a time when the cement industry is expected to add 25 million tonnes in FY10 and 30 million tonnes in FY11, as per various estimates.The cement industry?s capacity at the end of FY09 was 217.8 million tonnes. During FY 09,cement despatches grew 8% y-o-y to 181 million tonnes and exports reducing by 11.8% y-o-y to 3.21 million tonnes. During April 2009, the total dispatches grew 13 % y-o-y to 16.65 million tonnes. The cement industry?s utilization rate was 88% in FY09. The boom in the cement industry is expected to sustain the capacity utilization rate at more than 85% levels in FY10. In the cement industry, manufacturers typically hike the prices when the capacity utilization exceeds 85-86%.The stock of Deccan Cements has run up considerably from its 52-week low reached on December 2 last year. At cmp Rs 247, the company?s stock trades at a P/E of 4.5. However, players such as Andhra Cement and JK Cements trade at a comparatively higher P/E.Buy it for 2-3 year perspective.

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