Shiva Cement – Expansively Inexpensive

There are certain counters which usually go unnoticed by the investors despite having the potential to provide decent returns. Shiva Cement Limited (SCL), the Orissa-based cement manufacturer, is one such company. Though relatively unknown, there are many reasons to recommend the same to our investors in this column. The first and foremost factor is its expansion plan that will increase its capacity by almost four times to 6.6 lakh tonnes. Further, it is also planning to build a 25 MW (10 MW in Phase I and 15 MW in Phase II) power plant which will help the company reduce its operational cost. The best part is that the expansion is being carried out at a much lower cost while its margins are expected to go up by 7-7.5 times.

Further, the promoters have themselves subscribed to warrants convertible at Rs 11 (in the next 18 months) which is higher than its CMP of Rs 8.55. So this provides comfort to the investors. Another advantage is that SCL sells its whole production under the brand name of ACC, with ACC holding a 14.34 per cent stake in SCL.

But the most exciting factor is that after the completion of Phase I of the expansion, its replacement cost of Rs 315 crore will be higher than its enterprise value of Rs 240 crore. The replacement cost of its 6.60 lakh tonne capacity will be Rs 265 crore and the replacement cost of its 10 MW plant will be Rs 50 crore. This provides a good upside for the counter going ahead. Our recommendation is to buy the scrip at its current levels with a target price of Rs 12.50 in the next one year.

Phase-I of the expansion plan is expected to be completed by Q2 FY12. In Phase II the cement capacity will be expanded to 2 million tonnes and additional 15 MW will be added till Q4FY13. The total capex till FY13 will be Rs 800 crore. In an interview with a television channel, the company's official spokesperson had stated that with the implementation of new technology and a four-fold increase in capacity, its EBITDA margins were expected to increase by 7.5 times. The first stage capex is estimated at Rs 155 crore and SCL has lined up a debt of around Rs 80 crore while the rest will be in the form of equity. SCL has already issued 1 crore warrants at Rs 11 to the promoters to raise Rs 11 crore. The rest is expected to be carried out either through a rights issue or through private placement. Hence equity dilution of around 40 per cent is expected. As regards the valuations, as mentioned earlier its replacement cost will be Rs 315 crore and the EV will be around Rs 265 crore. This provides scope for further upward movement.

In FY09 there was a plant shutdown for more than 101 days. Hence the numbers are not comparable. But for 9MFY10 it has posted a topline of Rs 35.53 crore and bottomline of Rs 1.81 crore. For FY10 the management is expecting a topline of Rs 48 crore and EBITDA of Rs 10 crore. The scrip is therefore worth a buy in view of the long term factors.