Capacity Expansion And Brand Transition Will Drive Strong Long Term Cement Demand Benefits

Catalysts

About India Cements

India Cements is a regional cement manufacturer whose plants supply key housing and infrastructure markets across South and West India.

What are the underlying business or industry changes driving this perspective?

• Ongoing debottlenecking and brownfield expansions are set to lift India Cements capacity from 14.45 million tonnes to 17.55 million tonnes by January. This is expected to support higher volumes and revenue growth as utilization improves in strong demand corridors like Chennai and Rajasthan, which should translate into faster EBITDA and earnings growth.
• A focused program to upgrade energy efficiency through 21 megawatts of waste heat recovery and 192 megawatts of renewable power is expected to structurally lower power and fuel costs per tonne, directly supporting higher EBITDA per tonne and improving net margins over the medium term.
• Accelerated brand transition of India Cements volumes into the UltraTech franchise, with conversion already at 31 percent and targeted to rise quickly, should allow meaningful realization gains in high premium markets and drive a step up in revenue and operating margins as India Cements closes the gap to UltraTech pricing.
• Strategic capacity additions at Chennai and Rajasthan, where demand visibility is strong and project returns are guided at over 20 percent internal rate of return, position India Cements to benefit disproportionately from sustained housing and infrastructure build out, which should enhance return on capital employed and long term earnings growth.
• Debt reduction supported by sale of non core Indonesian coal assets and funding of growth mainly through internal accruals is likely to bring net debt to EBITDA close to 0.5 times, lowering interest costs and improving profit after tax conversion from operating cash flows.

Assumptions

This narrative explores a more optimistic perspective on India Cements compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming India Cements's revenue will grow by 14.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.8% today to 14.8% in 3 years time.
• The bullish analysts expect earnings to reach ₹9.4 billion (and earnings per share of ₹30.28) by about December 2028, up from ₹322.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹5.7 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, down from 414.5x today. This future PE is lower than the current PE for the IN Basic Materials industry at 29.4x.
• The bullish analysts expect the number of shares outstanding to grow by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• UltraTech is rapidly integrating and upgrading India Cements plants into its own lower cost, higher EBITDA per tonne network. As brand conversion moves toward 100% by June 2026, UltraTech could capture a larger share of the same regional markets India Cements serves, which may cap India Cements pricing power and volume growth, pressuring revenue and earnings.
• UltraTech's aggressive expansion plan toward 240 million to 245 million tonnes by fiscal 2029, with scope for a further 20 million to 25 million tonnes beyond 2030, materially increases long term industry capacity in India Cements core regions. This raises the risk of oversupply and more intense competition that could compress realizations and net margins.
• Large, multi year infrastructure and housing projects such as Vadhavan Port, new airports, data centers and extensive road and rail builds structurally support cement demand. However, UltraTech's scale, logistics reach and higher efficiency assets position it to capture a disproportionate share of this growth, which may leave India Cements with relatively weaker volume growth and slower expansion in EBITDA and earnings.
• UltraTech is moving its green and waste heat power mix toward about 65 percent, alongside extensive efficiency capex at acquired assets like India Cements, which structurally lowers UltraTech's delivered cost per tonne. If India Cements lags in execution speed or scale on similar initiatives, its relative cost position could worsen over time, squeezing net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for India Cements is ₹450.0, which represents up to two standard deviations above the consensus price target of ₹321.75. This valuation is based on what can be assumed as the expectations of India Cements's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹450.0, and the most bearish reporting a price target of just ₹115.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ₹63.4 billion, earnings will come to ₹9.4 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹430.95, the analyst price target of ₹450.0 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.