We think this is a great entry point in Holcim. The stock has been hit hard on its India exposure, with the Rupee falling 28% relative to the USD from May to August. Now, with the help of China recovering and a new Indian central bank governor, the Rupee is strengthening again. There are times when Holcim’s India exposure can be overdone, to the upside or downside, we think this is one of those times. India, via its two subsidiaries Ambuja and ACC (HOLN owns 50% of each currently) represents c.20% of fully consolidated EBITDA but 10% of EPS after minority holdings are stripped out. Even a -30% currency translation only takes 3% off EPS. A slowdown in volume and price growth is far more important, but given the improvement we see in China, we are positive on emerging markets and GDP sensitive products like steel and concrete at a time emerging market concerns are foremost in the minds of many investors.
EPS momentum in the European cement names has been weak, -5% to -15% in the last three months on average, partly because of FX but also negative weather impacts from Q1 and the beginning of Q2 which have impacts 2013 forecasts. But the valuation of Holcim is just too cheap. If consensus is right, when rolling forward numbers at the year-end Holcim would trade on 9.9x Y2 PE compared with a Y2 range of 11-16x in the last 10y ex crisis. Also, relative to the Stoxx600, Holcim is already at relative lows on a Y2 PE basis. It is also worth bearing in mind, as each year goes by, Holcim delivers further, therefore more weight can be placed on PE multiples, net debt/EBITDA in 2015 is forecast to be 1.4x compared with 2.6x in 2012. Relative to Lafarge (all in EUR), the underperformance of Holcim is quite stark, despite much better EPS momentum.
