Note from Nuvoco Vistas Corp: Buy-increase margins to close the gap with its peers

Nuvoco Vistas Corporation (NUVOCO) has become the fifth largest cement group in India and is among the top 3 in the Eastern region with a capacity of 23.8 million (as of September 21), after the acquisition of 8.3 million from NU Vista (formerly Emami Cement) in July ’20. We believe that the cost synergies of said acquisition, improved profitability, higher premiumisation combined with advantages of scale and operating leverage can result in an increase of around 30% (Rs 265 / te ) mixed Ebitda / te at Rs 1,180 / te in FY21-FY24E, with industry -the highest 22% Ebitda CAGR probably over FY21 to 24E.

The valuation at 8.6xFY24E EV / E or $ 125 / te adequately addresses concerns about a higher concentration in the Eastern region, higher leverage and lower profitability compared to its peers, in our opinion. As NUVOCO narrows its Ebitda / te spread against its peers, the valuation spread may narrow. We are initiating stock hedging with a buy note and a target price of Rs 645 / share (11x Sep’23E EV / E). Main risks: falling demand / prices and high concentration (~ 70%) in the Eastern region.

Acquisition of Nu Vista and expansion to generate a 12% CAGR by volume over FY21-FY24E: increase in usage in the north (with launch of Double Bull), expansion of the grinding unit by 1.5 mnte to Jojobera, Jharkhand and debottlenecking at various sites coupled with a full year consolidation of Nu Vista would result in volume growth of 40% to 22.6 million by FY24E, compared to around 16 million in FY21.

“Net debt on EBITDA” will decrease