Initiating with ‘Buy’ and a TP of Rs120

Research by JS Global Capital Limited

Initiating coverage on Cherat Cement with a ‘Buy’ rating. We initiate coverage on Cherat Cement limited (CHCC) with a ‘Buy’ stance and a Target Price of Rs120, implying an upside potential of 24% from last closing.

The stock has put up a strong show at the bourse off late (+15% FY16TD) on the back of

  • strong sector dynamics and
  • being the first company to announce brownfield expansion (COD expected in January 2017).

We believe that well-timed expansion will enable Cherat cement to become the biggest beneficiary of an ongoing construction boom in the country. We give a ‘Buy’ call on CHCC on the back of

  1. strong sector dynamics with local demand expected to post double digit CAGR in FY16-FY20 period,
  2. strong earnings outlook beyond FY17 post COD of new plant (due to tax incentives and higher
    dispatches),
  3. cheaper multiples in FY18 and
  4. benign outlook of input costs.

The expansion phase of CHCC is nearing completion and the company looks all set to reap benefits of high growth phase in the country.

Earnings to propel in FY17 post COD

CHCC trades at an FY17E P/E of 7.45x vis-à-vis the JS cement universe P/E average of 8.54x (12.8% discount) and KSE-100 FY17E P/E 8x (7% discount). Our strong conviction on cement sector’s high growth theme causes us to believe that the capacity utilization of company’s new 4,200tpd line will inch above 100% level at the end of FY24.

Jumping ahead of the pack

CHCC is the first manufacturer to come up with capacity enhancement since the last expansion cycle. We remain optimistic of current developments and flag CHCC as the biggest beneficiary of booming local demand being the first mover in the industry.

KATS Code: CHCC                     Bloomberg Code: CHCC PA                       Reuters Code: CHRC.KA
Market Price: Rs96.57            June 2016 Target Price: Rs120                 Valuation Methodology: FCFF

1-yr High / Low: Rs99.60 / 65.36
Estimated free float: 115mn shares (65%)

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