Deccan Cements - Rs.52.00

Incorporated in July79, Deccan Cements is an Andhra Pradesh based mini-cement manufacturer with its captive power generation. It is one of the very few mini-cement plants that is operating profitably in the country. Mini-cement plants enjoy lower excise duty on the cement produced and sold compared to the larger plants. It is an established player in its chosen markets and has been able to realize relatively higher prices than other mini cement plants.

Currently, the company has the capacity to produce 3,00,000 TPA of cement and 5,00,000 TPA of slag cement. The cost of production of slag cement is considerably lower than the cost of producing ordinary Portland cement. Due to various initiatives of the government and the industry blended cement like slag cement is fetching almost the same rate as Portland cement and is well accepted in the market. In FY04, slag cement accounted for 56 per cent of its sales but contributed substantially to the company's profit.Since cement production is highly power intensive, the captive power plant have been very handy for the company to reduce power costs considerably and stay afloat in difficult times. Due to poor flow of water' however, the hydel power is almost non-operational. But if it operates it has the potential to increase the company's cement production substantially and enhance the profitability of the power segment. In short the company can scale up its revenues and profitability even with the existing infrastructure.

In the South, cement prices depend mainly on demand from government agencies. In future, the demand-supply gap will further reduce due to the government's thrust on infrastructure and housing. Currently, though cement prices have again dipped to Rs.130 from the peak of Rs.150 due to lower demand still its higher than last year's price of Rs.90-100 per bag. The medium to long term industry prospects look bright and this is evident by the promoters increasing their stake regularly. In the June'04 quarter too, also they increased their stake by 5 per cent taking their total stake to 53 per cent.

In FY04, sales increased 31 per cent to Rs.116 cr. and NP jumped more than 4 times to Rs.5.95 cr. leading to an EPS of Rs.9. In Q1FY05, sale was up 16 per cent to Rs.32.40 cr. but NP rose only 7 per cent due to the increase in tax provision. The company has a small equity of Rs.7 cr. with huge reserves of Rs.50 cr. and book value of Rs.82. It's a regular dividend paying company it paid 20 per cent dividend in FY04. With cement prices expected to rise again in future, the company is estimated to clock sales of Rs.140 cr. and NP of Rs.9 cr., which will translate into an EPS of Rs.13. So at current market price (CMP) it is trading at less than 4 PE leaving ample scope for further appreciation. Scrip can be accumulated for long term to get 100 per cent return in 15-18 months.