The Hindu Business Line : Prism Cements: Buy

EXPOSURE can be considered in the Prism Cements stock with a one-two year perspective. There could be potential for gains linked to an improvement in fundamentals as well as from the possibility of Prism Cements becoming the focus an acquisition target.

It would be tough for smaller players such as Prism Cements to stay in an industry that is likely to see further consolidation.

But with a strong promoter in the Raheja group, this process may get put off as much as possible to secure a higher price.

We have a buy recommendation outstanding on the stock at Rs 9 in September 2003, based on the likely gains linked to the consolidation process in the industry. Our view now is buttressed by the prospects of higher profitability.

Aided by a sharp reduction in operating costs and interest outgo, Prism Cements has managed to close FY 04 with pre-tax profits and cash flows from its operations.

The emergence of a better balance between demand and supply has led to sustained firm price trends in the northern and eastern markets compared to the trends over the past three years. If cement prices stay at high levels, the turnaround may be sustainable.

We continue to believe that Prism Cements will be a part of an acquisition process. This is because:

The emerging upswing in the cement industry cycle could make prices attractive for would-be sellers. This should, over the next year or two, trigger a bout of acquisitions by Indian majors as well as MNCs.

A whiff of activity could lead to an upside in stocks of smaller cement players. Prism Cements would be no exception, even if it is not a participant.

As the Rahejas have shown staying power during a protracted difficult period for the industry, they are likely to be even more comfortable playing the waiting game now, as fundamentals show signs of improvement. This would enable them to exit at an attractive price.

Rahejas stake of about 38 per cent places them in a position of strength when they decide to take the exit.

The presence of strong promoters has always ensured that acquisitions happen at a substantial premium to the market price.

A capacity of just two million tonnes would also make it tough to stay the course over the long term as the consolidation process gathers momentum in the next few years.

Such players, especially in the northern and eastern markets , do not have any significant advantage that could enable them to pursue growth.

There has been no indication by the company of any intent to pursue growth through capacity expansion. Its financials do not support such a strategy.

The equity base of about Rs 300 crore and the reluctance of lenders to bankroll capacity creation by smaller players is likely to stall any plans in this regard.

Buy the stock with a long-term perspective, as its participation in the consolidation process may not be immediate.

For patient investors with a penchant for high risk, the returns are likely to be attractive.

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