Report on Mangalam Cements

Mangalam Cement (BUY) May 17, 2007
C.M.P: 140 (4.45X08E) Target Price (12 months): Rs. 200
Investment Argument:
• We initiate coverage on Mangalam Cements Limited (MCL) with a BUY, due to its very attractive valuations.
• MCL is a major Rajasthan based cement player with an aggregated capacity of 1.5 million tonnes. The company is set to become a significant player with its current capacity expansion going up by 0.5 mn tons which is to be commissioned by September'07.
• We expect the company to post a robust topline on the back of fresh capacities coming on board for FY08 inspite of the likelihood of a price decline of Rs. 4-5 per 50 kg bag.
• MCL has repaid its entire long-term debt as on Oct'06. It is also setting up 17.5 MW thermal based captive power plant (to be commissioned by Jun'07) which would result in savings in power cost to the tune of Rs 133 per tonne.
• Cement offtake was boosted due to 14.8% growth in consumption level in North India during this quarter. In Rajasthan, consumption grew by 20% YoY, which accounts for 35-37% of the MCL’s dispatches.
• On a conservative basis, our 12 month target is Rs. 200 (6.45X08E).
Investment Positives:
Well Positioned in In North India: MCL has 2 cement plants in the state of Rajasthan with capacities aggregating to 1.50 million tonnes (capacity utilisation levels of more than 100%) catering to the northern cement markets of Rajasthan, UP, Haryana & Delhi. We expect the cement demand in the North to grow by 12% YoY in FY07E & FY08E driven by strong housing demand and infrastructure development in the region. Fresh capacities are expected to come up only by end FY08E and early FY09E, hence we expect the cement prices to remain stable during FY08E respectively. However, the deadlock between the government and the cement industry may trigger a possible price decline of Rs 4-5 per 50 kg bag.
Expansion of cement capacity: MCL has undertaken an expansion plan for increasing its cement capacity from 1.5 mn tonnes currently to 2.0 mn tonnes by September'07 at a capex of Rs 750 million, which is to be entirely financed from internal accruals. This would help the company to service the increasing demand in its existing markets resulting in increased EBITDA margins.
Captive Power Plant - Key Positive: MCL is setting up a 17.5 MW thermal based captive power plant, which would take care of 100% of its power requirement for the 2.0 million tonnes cement capacity. The captive power plant, which will be commissioned in September'07, would save about Rs 2 per unit of power. Further, the captive plant would also ensure uninterrupted power resulting in increased operational efficiencies.
Healthy Financial Restructuring: MCL came under the Board for Industrial and Financial Restructuring (BIFR) umbrella after being declared a sick unit in May 2002. As on September 30, 2003, MCL’s total debt stood at Rs 2.4bn, of which Rs 2.1bn were long-term secured loans including interest dues of around Rs.1,025mn. A restructuring plan was made by the company’s operating agency IDBI, wherein MCL offered a one-time settlement to financial institutions to whom it owed money. The entire interest component of the loans was waived off. As per the scheme, the promoter companies brought in Rs.1.2bn, Rs.382mn was generated from internal accruals and loan of Rs.550mn was availed off to set up a captive power plant.

Financial Highlights:
Details (Rs. Cr) FY06 FY07 FY08E
Net Sales 429 228 500
Operating Profit 102.85 70 140
Net Profit 69 42 90
EPS 24.45 14.85 31.55
The Company has changed its accounting year from October-September ending to 31st March ending. Consequently, the current year's accounts have been prepared for six months, from 1st October, 06 to 31st March. 07. Hence, previous year's figures are therefore, not strictly comparable with the figures of current period.
Quaterly Highlights:
Details (Rs. Cr) Q407 Q406
Net Sales 116 110.6
Operating Profit 35.75 29
PBT 32.35 23.13
Net Profit 21.5 22.75
EPS 7.55 8
The company’s sales volume posted a flat growth for the quarter, with a mere 5.0% growth YoY to Rs. 1160 mn. However, net realization has improved by 22.7% YoY to Rs.151/50 kg bag, The EBITDA margins improved by 474 bps to 29.3%, but with the company now falling into the full tax bracket, the PAT came down (5.4) % to Rs. 215 mn.
Risks & Concerns:
• Any slowdown in infrastructure spending and sharp drop in cement prices can affect the profitability of the company.

Outlook:
Our outlook for the company and the cement sector as a whole remains positive. Going forward, continued demand and higher utilization levels are expected to boost earnings for cement companies despite rise in freight and raw material costs. The housing sector, IT/ITES and higher infrastructure sector spend remain to be the key growth drivers for the cement industry.



Valuation:
At the current price of Rs 140, MCL trades at an EV/EBIDTA of 3.5 x FY08E and at a P/E of 4.5 x FY08E. EV/Tonne for FY08 at an enhanced capacity of 2 million tonnes stands at USD 65 (including 17.5 MW power plant) which is far lesser than the cost of setting up a 2 mn ton cement plant. With a debt free status, increased capacity by Q2 FY08 and expected improvement in operational efficiencies post installation of captive power plant, we believe that MCL is a good long term investment. We recommend a BUY on the stock with a target price of Rs 200. At our target price the stock will be valued at EV/EBITDA of 5.0 x FY08E and PE of 6.45 x FY08 E of Rs 31.5. At our target price the company is valued at an EV/Tonne of USD 86.5.
Analyst: Akhil Reddy.



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