Mangalam Cement

 

 

Mangalam Cement seems to be a good bet for mid-term considering its strong presence in north India where demand is high

 

FOR cement players, North India is one of the fastest growing regions and production in this region grew 13.7% y-o-y during the April 2009-February 2010 period, according to various estimates. A ramp-up in construction activities for the forthcoming Commonwealth Games and a pickup in residential activity in this region have boosted the demand for cement.

   BK Birla Group-controlled Managalam Cement, which has a presence in the northern region, is expected to benefit from the strong demand for cement here. We had recommended this stock in our issue dated November 23, 2009 and since then, the stock has gained nearly 64.5% and we believe that there is still potential upside in this stock over the medium term. The stock currently trades with a P/E of just 4.1 times on a trailing four-quarter basis, which is among the lowest in the industry.

   In addition, it trades at nearly 2 times its trailing book value as compared to a range of 0.6 and 2.7 times between March 2007 and March 2009. Over the past fortnight, the stock has witnessed a sharp rise in delivery trades in the counter — the proportion of deliverable quantity to total trading volume of Mangalam Cement shares. This indicates a bullish sign for the stock in the near to medium term, say analysts.

CAPACITY:

The company had a capacity of two million tonne at the end of March 2009, double from two years earlier. Its key markets are Rajasthan, Uttar Pradesh and Delhi, where demand for cement has remained strong and prices have also increased on a y-o-y basis in the quarter ended December 2009. However, this was in sharp contrast with the situation in southern region in the third quarter of FY10.

   The company had invested Rs 198.5 crore between March 2007 and March 2009, while its operational cash flow during this period was Rs 277.7 crore. As a result, its leverage ratio was just 0.2 at the end of the previous financial year despite it doubled its cement capacity.

EXPANSION PLANS:

The company's board had earlier approved the setting up a new cement manufacturing plant with a capacity of 1.5 MT at its existing facility at Kota district, Rajasthan, along with a captive thermal power plant with a capacity of 17.5 MW. The cost of this project is estimated at Rs 750 crore that would be financed by internal accruals to the tune of Rs 300 crore and the remaining from loan and debt instruments. And given the company's low leverage ratio at the end of March 2009, coupled with strong cash flows, analysts don't expect any significant increase in its debt levels over the next two-three years.

FINANCIALS :

The company's operating profit margin improved by 850 basis points yo-y to 30.4% in the December 2009 quarter, helped by its realisations that grew nearly 10.2% to Rs 3,500 per tonne. The company's cement dispatches fell nearly 4.3% to 427,000 tonne in the third quarter of FY10, but strong realisations helped its total operational income improve by 5.5% y-o-y to Rs 149.4 crore.

VALUATIONS:

Mangalam Cement at Rs 204.3 per share trades at 4.1 times on a trailing four-quarter basis, while its peers, such as Binani Cement trades at 5.6 times and JK Cement at 5.4 times. Investors could consider Mangalam Cement to leverage medium to long- term growth opportunities.