Sushil Finance views on Mangalam Cement, Avaya GlobalConnect, Ahluwalia Contracts

Sushil Finance on Mangalam Cement - Target Rs 235

Sushil Finance has recommended buy rating on Mangalam Cement with a target of Rs 235, in its research report.

"Mangalam Cements (MCL), a B.K. Birla Group company, manufactures Cement and Portland Pozzolana Cement (PPC) using the dry process and markets them under the brand names of Mangalam and Birla Uttam. The manufacturing units of the company namely Managalam Cement and Neer Shree Cement are both located at Morak in the Kota district of Rajasthan. The company has a very strong Balance Sheet with zero Net Debt & Net Cash of Rs 285 million and we expect it Net Cash accruals to grow to Rs 2084 million by FY11. At the CMP, the stock trades at an attractive valuation of 3.9x its FY11 earnings and EV/EBIDTA of 1.2x FY11E, with high FY11 ROE of +20%," says Sushil Finance research report.

Sushil Finance on Avaya GlobalConnect - Target Rs 245

Sushil Finance has recommended buy rating on Avaya GlobalConnect with a target of Rs 245.
"Avaya GlobalConnect, with its best in class communications products & solutions and alliances with global technology leaders, is uniquely positioned to offer high-quality solutions to enterprises across industries. Recently, the Company has taken several measures to reduce its operating cost and has developed many industry-specific solutions, which are well-accepted by its customers. These continuous efforts have started benefiting the Company, while in Q4FY09 its profitability has improved significantly. Going forward, we expect AGC’s consolidated APAT to grow by 36.5% & 22.7% in FY10E and FY11E respectively."

"At the CMP, the stock is trading at an attractive valuation of 9.1x & 7.4x its FY10E & FY11E earnings of Rs. 20 & Rs. 24.5 respectively. Moreover, AGC has strong balance sheet with high net cash and is available at an attractive 2.3x FY11E EV/EBITDA. We recommend “BUY” rating on the stock, with a price target of Rs 245, at which the stock would quote at PER of 10x based on FY11E Earnings," says Sushil Finance research report.

Sushil Finance on Ahluwalia Contracts - Target Rs 228

Sushil Finance has recommended buy rating on Ahluwalia Contracts with a target of Rs 228, in its research report.

Ahluwalia Contracts, ACIL has a strong order book of Rs 53 billion and its order-book to bill ratio is likely to improve further in near future. This gives a clear visibility to the earnings of the company for more than two years. Its strategy to increase infrastructure order book would ensure growth until a demand revival is seen in the retail and commercial projects. We expect the company to grow at a CAGR of 30% for next two years. At CMP , the stock is trading 14x FY11E EPS of Rs.14 & 10x FY12E EPS of Rs 19. Given its strong order book, strong balance sheet and proven track record of the management of timely execution of the projects, ACIL is well poised to ride the construction boom in the country and thus we initiate coverage with a Accumulate rating on the Company with a target price of Rs 228 (based on 12x its FY12E EPS of Rs 19).

Mangalam Cement

Mangalam Cement operates in northern markets where demand is still strong due to a plethora of government-funded projects

the past three years, thanks to robust demand conditions. The octogenarian industrialist had recently willed this company to granddaughter Vidula Jalan. However, his grandson Kumarmangalam Birla, who will inherit BK Birla controlled Kesoram Industries and Century Textiles, will own a 17.7% stake in Mangalam Cement via these entities and account for a significant portion of the promoter holding.

The Mangalam Cement stock is possibly one of the cheapest in the sector right now, trading at just 2.6 times its trailing 12 months earnings. Also, it trades at just 1.2 times its book value for the year ended March ’09, coupled with a high dividend yield of 4.6%. This stock provides an attractive investment opportunity for long-term investors.

CAPACITY & EXPANSION PLANS

Mangalam’s capacity was 2 million tonne at the end of FY 09, double the level from two years ago. The company invested Rs 198.6 crore as capex during this period and its cash flow was Rs 277 crore. Despite the capex, Mangalam Cement’s leverage ratio was just 0.17 at the end of March ’09, compared to 0.48 two years earlier.

Its key markets are Rajasthan, UP and Delhi, where demand conditions have remained strong thanks to governmentfunded projects and rural housing projects, and price realisations have also remained higher on a y-o-y basis. The board of Mangalam Cement had earlier given its in-principle approval for setting up a new cement plant with a capacity of 1.5 million tonne at its existing plant site in Rajasthan’s Kota district. In addition, the company plans to set up a captive power plant with a capacity of 17.5 MW, for which it has placed orders.

The cost of this expansion project is estimated at Rs 750 crore, which would be financed via internal accruals to the tune of Rs 300 crore and the remainder by debt. Given the strong cash flows of Mangalam Cement, financing this project over the next two years should not be a problem.

FINANCIALS

The company’s operating profit margin rose by 1,460 basis points y-o-y to 36.2% in the September ’09 quarter, helped by its realisation that improved an estimated 23.2% y-o-y to Rs 3919 per tonne. However, the company’s total despatches declined 2.1% y-o-y to 423,000 tonne in the second quarter of FY 10.

Compared to its peers, Mangalam Cement has handled its operational costs quite efficiently. For instance, in the year ended March ’09, the company spent nearly Rs 831 per tonne on power & fuel costs. The corresponding figure for Shree Cement and JK Cement was Rs 781.6 per tonne and Rs 1,000 per tonne, respectively, for FY 09. Also, while Mangalam Cement has reported a decline in its power cost over last three years, its other two peers have reported a rise.

VALUATIONS

At market price, Mangalam Cement trades with a P /E of just 2.6 times its trailing earnings. Binani Cement, on the other hand, trades at 5.4 times while JK Cement trades at 3.9 times. Investors could consider Mangalam Cement for long-term investment.

Kesoram Industries

Kesoram Industries is one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group
KESORAM Industries, the flagship company of the BK Birla Group, is a diversified player with a presence in cement and tyres. Octogenarian industrialist BK Birla had recently willed this company to his grandson, Kumar Mangalam Birla. Kesoram has benefited from the boom in the cement industry over the past three years, which helped the company offset the slump in profits of its tyre division. It is now set to emerge as one of country’s leading tyre makers. The company is currently one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group, India’s third largest business house.

Business:

Kesoram Industries’ installed cement capacity at end of FY09 was 5.3 million tonnes, with plants in Karnataka and Andhra Pradesh. In addition, the company has recently brought on stream an additional 1.6 million tonne cement capacity. This additional capacity is expected to help the company’s net sales jump by Rs 500 crore in FY10. The tyre division’s capacity was at 37.1 lakh units at the end of FY09, with plants in Orissa and Uttarakhand. The company’s viscose filament rayon yarn capacity is at 6,500 tonne at the end of March 2009. The cement division contributed nearly 48% to the company’s topline in FY09, while tyres accounted for 45.5%. The company is currently setting up a tyre plant to cater to the twowheeler sector at Uttarakhand with a capacity of 78 lakh tyres per annum and capex of nearly Rs 190 crore.

Expansion plans:

The company is planning a further expansion plan of nearly Rs 1,550 crore, which would entail the addition of 1.65 million tonnes cement capacity in Karnataka, with a capex of nearly Rs 750 crore. Also, the company plans to invest Rs 800 crore for expansion of its tyre business. Post-expansion, Kesoram is set to emerge as one of the top three tyre makers in the country. This expansion plan will be financed by a mixture of internal accruals and debt. During FY09, Kesoram’s cash flow from operations was to the tune of Rs 370 crore. Against this, cash used for investment activities was a little over Rs 1,034 crore. The company’s debt-equity ratio had risen to 1.46 at the end of FY09, slightly higher than the previous year. However, with Kesoram’s comfortable cash flow and expected turnaround in the tyre business, the leverage ratio is expected to either remain stable or decline over the next two to three years.

Financials:

In the March 2009 quarter, the company’s net sales grew 26.1% to Rs 1,108 crore, but its operating profit margin declined due to higher operating costs, especially in the tyre business.