Buy India Cements & Madras Cements, Time Frame – 3 months

Cement companies in the South (especially in Tamil Nadu and Andhra Pradesh) raised prices upto INR 10/bag one-two weeks prior to the price freeze on March 9, 2007. South has witnessed sharpest cumulative price increases of ~INR 23-30/bag (INR 3-5/bag for other regions) in Q4FY07. This increases the base for Q1FY08 realizations.

In Apr-May ‘07 as well, Southern manufacturers have raised prices by ~INR 6/bag. Apart from these hikes in the trade segment, some manufacturers in Kerala and Tamil Nadu have rationalized prices between trade and non-trade segment by INR 5-7/bag in May ’07. Some AP manufacturers have also absorbed the benefit of excise duty cut which is profit accretive (South accounts for 82% of India Cements’ and 97% of Madras Cements’ FY06 sales).

We believe that the above will translate into earning surprises.

Accordingly, India Cements’ FY08E revenue is expected to grow by 32.7% led by 18.1% realization increase while capacity additions will be muted in FY08E. Earnings are expected to grow by 47.8% in FY08E

Madras Cements’ FY08E revenue is expected to improve by 35.1% on the back of 16.4% realization improvement and 16% volume growth with 2 mtpa coming on-stream. Its earnings are expected to grow by 49.2% in FY08E.

At a CMP of INR 191, India Cements trades at 1 year forward EV/EBITDA of 5.19x FY08E and 5x FY09E while at a CMP of 2867, Madras Cements trades at 1 year forward EV/EBITDA of 5.1x for FY08E and 4.1x FY09E

Buy Chennai Petroleum, Time Frame – 12 months

Chennai petroleum, a standalone refinery with a capacity of 10.5 mmtpa would be the key beneficiary of the extended refinery upturn. We expect Asian refinery margins to remain firm till 2009 as time and cost overruns on most of the new refinery capacity additions would constrain refinery capacity at least till FY09.

CPCL is also undergoing a debottlenecking of its Manali refinery which would increase its total refinery capacity by 1.0 mmtpa at a cost of just INR 1.3 bn compared to INR 15-18 bn required for a similar green field capacity expansion (HPCL’s Bhatinda and BPCL’s Bina refinery). Assuming INR 10 bn/MMTPA capacity implies value accretion of INR 8.7 bn or INR 58 per share.

Short term triggers remain in the form of exceptionally high existing regional GRMs that could lead to record profits in Q1FY08. CPCL may report Q1FY08 EPS of ~INR 20 per share.

At CMP of 247, CPCL trades at 7.1X and 7.0X our FY08 and FY09 EPS with a FY08 dividend yield of 4.9%. On EV/EBITDA basis CPCL trades at 4.9X and 5.0X times FY08 and FY09 earnings. CPCL’s FY08 Book Value of INR 198 per share implies P/BV of 1.2x. We have a BUY recommendation on the stock.