Buy Mangalam Cement with a target of Rs 300: Market Calls

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Mangalam Cement Limited was promoted in the year 1978 by the famed House of Shri B.K.Birla, the most eminent and illustrious industrialist of the country. It is a professionally managed and well established cement manufacturing company enjoying the confidence of consumers because of its superior quality product and excellent customer service.

The company has recently commissioned its state-of-the-art new cement plant with German technology for producing 7 lakh tonnes per annum at its existing site at Morak, Distt. Kota in Rajasthan under the name of Neer Shree Cement.

"We initiate coverage on Mangalam Cements Limited (MCL) with a BUY. MCL is a Rajasthan based cement player with an aggregated capacity of 1.5 million tonnes. MCL has repaid its entire long-term debt as on Oct'06 and has undertaken cement capacity expansion by 0.50 million tonnes which is to be commissioned by September'07. 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." 

"We expect cement prices to remain firm during FY07E & FY08E since we believe that major capacity additions to come by end FY08E and early FY09E. This would drive MCL to report a 21% CAGR topline growth between FY06- FY08 with EBITDA margins improving from 24% in FY06 to 29.7% in FY08E and PAT increasing at a CAGR of 30% during the period FY06-FY08E. With an expected CAGR of 30% in EPS over FY06-FY08E, we expect ROCE and ROE levels to remain healthy at 28.5% and 36.0% respectively as on FY07E and 41.9% & 55.4% ROCE & ROE respectively for FY08E."

Investment Positives   

"Well positioned in the northern markets where the cement prices are expected to firm up"

"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 firm during 2 nd  half of FY07 & FY08E respectively." 

Expansion of cement capacity  to 2.0 mn tpa

"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."

Power costs savings to accrue from FY08E onwards

"The commissioning of a 17.5 MW power plant, would result in savings of power cost by about Rs 133 per tonne. MCL is setting up this 17.5 MW thermal based captive power plant, which would take care of 100% of its power requirement for the 2.0 million tonne cement capacity.  The captive power plant, which will be commissioned in September'07, would save about Rs 2 per unit of power resulting into a savings in power cost by about Rs 160 million. Further, the captive plant would also ensure uninterrupted power resulting in increased operational efficiencies."

MCL has paid back all its long-term debt

"MCL has been able to repay its entire debt of Rs 960 million as on Oct'06. The only loans on the company's books are on account of deffered sales tax loan totaling Rs 93.5 million (interest free) and security deposits from dealers – Rs 70 mn (interest @ 8% p.a). Further, it has tied up for a Rs 525 million loan for funding its capex (Rs 700 million) of 17.5 MW captive power plant. With this the D: E for MCL has become healthy at 0.2 as on FY06 and post expansion we expect the D: E to move up to 0.3 by FY08E."

Cash Generation to remain healthy

"We estimate MCL to report healthy operational cash flows in the next two years that is up to FY08E. We believe that MCL would report cumulative operational cash flows to the tune of Rs 1348.4 mn between FY07-FY08E. These robust cash flows would ensure that the company finances a major portion of its capex and debt servicing initiatives in the next 12-18 months from internal accruals without any equity dilution."

Concerns

"Any slowdown in infrastru
cture spending and sharp drop in cement prices can affect the profitability of the company." 

Valuation

"At the current price of Rs 208, MCL trades at an EV/EBIDTA of 10.1 x FY07 (6 months period) and 3.3 x FY08 estimated EBITDA of Rs 585.1 million & Rs 1698.9 million respectively. EV/Tonne for FY08 at an increased capacity of 2.0 million tonnes stands at USD 63.5 (including 17.5 MW power plant)."

"The EV/ Tonne of similar smaller cement companies like JK Laxmi (capacity: 3.4 million tonnes) and Mysore Cement (2.1 million tonnes) for FY08 stands at USD 76 & USD 103 respectively. 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 306 based on DCF valuation. At our target price the stock will be valued at EV/EBITDA of 5.0 x FY08 and PE of 8.4 x FY08 EPS of Rs 36.2. At the target price the company is valued at an EV/Tonne of USD 94.5."