Stock Review: Mangalam Cement

 

Cement despatches in the northern region are on an uptick. So, Mangalam Cement can leave its past behind and expect some better days ahead. Hardening of prices will bring more good news

 

MANGALAM Cement, which is controlled by veteran industrialist BK Birla, has benefited from strong demand conditions in the northern part of the country over the past few months. Cement prices have increased on a-per-tonne basis in this region during the current peak construction season.

   As per brokerage house estimates, cement despatches in the northern region grew nearly 14% year-on-year between January and February 2011, significantly higher than the all-India growth during this period. This was due to a pick-up in government-funded infrastructure projects and real estate sector, coupled with dealer restocking. As a result, cement prices in New Delhi are currently at 270 per bag, a jump of nearly 20% from the levels at the end of the third quarter. This should help cement players in the region, which had faced a rather difficult operating environment during the second and the third quarter of FY11. We had recommended this stock in our issue dated April 19, 2010 and since then the performance of the stock has been lacklustre. It has declined 42.6 per cent since then compared to a 11.2 per cent rise in the Sensex.

CAPACITY:

The company's installed capacity was two million tonnes at the end of March 2010, double from the level three years earlier. Its production facilities are located in Rajasthan. Mangalam Cement's key markets include Rajasthan, Uttar Pradesh and Delhi. The larger players in the northern region include Shree Cement whose capacity was 10.2 million tonnes at the end of March 2010. Mangalam Cement's board had earlier given its approval for BK Birla group-company Mangalam Timber Products to be merged with itself. A swap ratio of one share for 10 shares in Mangalam Timber Products was fixed, and regulatory approvals are still awaited. Mangalam Timber is engaged in the production of medium density fibre board, and key user industries include real estate and construction sectors.

FINANCIALS :

Mangalam Cement's performance in the December 2010 quarter was adversely affected by a fall in realisations on-a-per-tonne basis in the quarter. Mangalam's despatches fell 18.6% year-on-year to 0.35 million tonnes in the third quarter while realisations also declined 9.2% to 3,154 per tonne. As a result, its operating profit margin crashed by nearly four fifth on a year-on-year basis to just 2.6% in the third quarter while net sales fell 26% to 110.4 crore in the quarter.

   Also, during the first and second quarters of the current financial year, Mangalam Cement grappled with a fall in realisations on-a-per-tonne basis, and the resulting impact on operating margins. The company had invested 264.5 crore during the financial years ended March 2007 and March 2010 while its operational cash flow during this period was 404 crore. As a result, its debt to equity ratio was just 0.04 at the end of March 2010.

VALUATIONS:

Mangalam Cement trades at a P/E of just 7.4 times on a trailing four-quarter basis. Other players operating in the region like JK Cement trades at a P/E of 17.4 times while larger rival Shree Cement trades at more than 30 times.