Target: ₹ 827

CMP: ₹ 539.2

We are initiating a hedge on Nuvoco Vistas with a buy rating and a price target of 827 (11x its consolidated EBITDA for September 23E). The company experienced inorganic growth to become the sixth largest cement company in India and consolidated its leadership position in the east.

A significant retail presence in the high growth Eastern region supported its operating margin during FY20-21. It is expected to expand further to INR / MT 1,177 in fiscal year 23E, building on cost initiatives and synergies from the integration of recently acquired NU Vista (formerly Emami Cements).

The recently closed IPO also strengthened Nuvoco’s balance sheet. We anticipate strong cash flow to help accelerate the company’s expansion plan in Karnataka. The sweating of assets and the reduction in leverage should strengthen yield ratios. Nuvoco’s leverage ratio has stretched, due to the two mega acquisitions. However, with a significant equity injection of 1,500 crore from the just completed IPO, a strong outlook for operating cash flow and lower capital spending, we believe its Net debt / EBITDA will cool to less than 1x FY23E from nearly 4x during FY17-21. We like Nuvoco for its balance sheet recovery after two mega acquisitions and its strong operating performance, driven by structural revenue and cost triggers. In our opinion, Nuvoco’s continued strong performance should drive the revaluation of valuation multiples.