Background: Cement is one product which is mostly dependent on local factors and is relatively insulated from the global turbulence, be it Fed action or China. Thus if we can find companies that are producing cements in the regions where there is disproportionate infrastructure growth and get them at good valuations, we would most likely have a winner on our hands. PANYAM CEMENTS & MINERAL INDUSTRIES is one such potential winner.
The Company: Panyam Cements & Mineral Industries is promoted by the promoters of Andhra Pradesh based Nandi Group and boasts of a strong management with background from IIM Ahemdabad. This A.P based Cement company supplies its products to TN,Karnataka,Goa and Kerala apart from Andra Pradesh. The present promoters had bought this company from previous promoters in late 2007 (at the height of infrastructure boom) at a price of 55rs/share which is close to today’s price. The company under new leadership undertook expansion but needless to say that came at a very wrong time. After that what followed was five years of dismal infrastructure growth which created a lot of demand and price problems. If this was not enough, the AP-Telangana issue created havoc for the company and demand almost dried. All this led to severe crisis in the company which also led to disconnection of power by APCPDCL (A.P. Central Power Distribution Company Ltd.) taking the operations of the company to stand still. This was the worst time for the company.
But things have decisively turned around in the last three quarters for Panyam Cements. The power issue is resolved, the demand is surging and the cement prices are back on top. The Central Govt, along with a strong state government in the leadership of Chandra babu naidu has given a special thrust to Infrastructure development and this has only helped. Infact A.P. is the first state to complete india’s first river interlinking project. Coupled with this are the strong infrastructure development mandated state governments in its key customer states of Karnataka, Goa, TN etc. The power problem is also resolved for the company and the plant has started working fully. This could be the first year when the entire capacity would come into play which could mean a strong growth in the coming quarters for this company supported by strong industry tail winds. The promoters have been increasing their stake and the promoter pledge has also dramatically decreased and is now less than half of its previous quarter pledge of 99%.
- Promoter holding is consistently increasing in the last the few quarters and now stand at 52.15%.
- Promoter pledge has decreased. Promoters till last quarter had pledged 99% of their holding but have now reduced to around 47% of their holding. The promoters released most of their earlier pledge from L&T finance and created a new but lesser pledge with Kotak Bank.
- The company is witnessing strong demand from the neighboring states thanks to strong industry tailwinds.
- The debt has decreased since last year to 50cr from over 59cr.
- We are getting a chance to get in the company at a price which the present promoters paid to buy this company (55Rs/Share).
- This is the first time in so many years that the company is going to report a full year earnings. Strong earnings growth is going to follow. This is evident from the last three quarter earnings.
Valuations: Panyam Cements is trading at juicy valuations of around 3.2 times FY16 EPS of around 18Rs (to 21 Rs) and at a market cap of just 90cr (as against the 88cr sales done in just one quarter of Jun 15). It does not make sense to look at trailing PE because last year there were hardly any operations of the company (as explained above). The company has reported excellent operational performance in the last two quarters (i.e after re-starting of operations) and the company is expected to even better the performance in the next remaining quarters of the present FY. For the first quarter this FY, the company reported a turnover of over 68cr with a NP of 7.93 cr and an EPS of around 4.94 in just one quarter. This performance is expected to continue on back of strong operational performance and the demand that company is witnessing in the state(s) (as explained earlier).
Technicals: The strong turnaround is incidentally backed by very strong technicals. There were two strong lows made by nifty in the recent weeks. One was on panic Monday (24th Aug) and then a lower low was made which was around 150 points lower than earlier lows but its very significant to note that the stock Panyam made just one low which was during the panic Monday and when the nifty made the second significant low, Panyam made a low which was “10% higher than earlier low” and what’s more, that the lows were made on very small volumes. This is a sign of great technical strength of a stock. This week also stock has started a fresh upmove crossing one daily resistance after another and infact gave signs of fresh upmove on Friday. The stock is technically extremely solid.
The stock was languishing on back of issues plaguing the company which were mostly out of its control. Although it expanded its capacity by three times (to 1800 M. Tones/day) a couple of years back, it was unable to perform up to its potential due to the reasons explained above. Now the stock is on the cusp of strong re-rating on back of strong earnings growth. This is the second cement stock that we have discussed and before anyone starts asking questions like which one should one buy, I would just say please go through the stock story and decide yourself.
Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.