Mangalam Cement - In-line operating performance; maintain Buy - Centrum

Mangalam Cement's Q3FY13 result was in line with our estimates on operational parameters with op. profit at Rs306mn vs. est. Rs317mn and op. margin at 18.3% vs. est. 18.4%. However, lower than expected other income of Rs23mn (vs. est. Rs45mn) and higher tax rate of 46.4% due to the delay in up-gradation of plants (vs. est. 27.7%) resulted in profit of Rs139mn (vs. est. Rs211mn). The company is planning to increase its capacity by 1.25mt (62.5% of current capacity) by Q3FY14E, which will result in strong volume growth from Q4FY14. We believe post this expansion grey cement volume growth will be 36.5% YoY in FY15E. We expect sales volume of the company to grow at a CAGR of 21.4% between FY12-15E. Sales mix of the company is concentrated in the North and Central regions, where we believe demand-supply dynamics will be favourable and expect better utilization rate going forward. EPS of the company is expected to grow at a CAGR of 41.4% between FY12-FY15E led by strong volume and realization growth. We maintain Buy on the stock with a one-year price target of Rs284.

Lower sales volume impacts revenues and op. profit: Sales volume declined 10.6% YoY to 0.45mt led by 96% YoY drop in clinker sales volume. Cement sales volume was up 4.5% YoY to 0.45mt. Clinker sales volume declined to 3,093tonnes against 76,000tonnes in Q3FY12. We believe that lower clinker sales volume was mainly due to improvement in utilization rate of Unit I where the production was impacted last year. Blended realization was up 9% YoY to Rs3,710/tonne. Revenue of the company declined 2.6% YoY to Rs1,678mn. EBITDA declined 22.4% YoY to Rs306mn.

Increasing costs impact margin despite higher realization: Despite 9% YoY increase in blended realization, op. margin declined 4.7pp YoY to 18.3% impacted by higher op. costs. Op. cost/tonne increased 15.6% YoY primarily due to 44.9% YoY increase in raw material cost, 18.7% YoY increase in freight cost and 37.5% YoY increase in energy cost. EBITDA/tonne declined 13.2% YoY to Rs677/tonne.

Update on capex plans: The company is planning to expand its clinker capacity by 0.5mt to 2.2mt by Q1FY14E. Grinding capacity is expected to increase by 1.25mt to 3.25mt by October '13 through brownfield expansion. The management suggested that the capex plans are largely on schedule and expects grinding unit to get commissioned by October '13.

Capacity expansion to drive volume growth in future: We believe that post this expansion cement volume growth will be 36.5% YoY to 2.9mt in FY15E. We expect cement sales volume growth at a CAGR of 21.4% between FY12-FY15E. In 9MFY13, cement sales volume has increased 18.6% YoY.

Maintain Buy: The stock is currently trading at 3.6x FY14E and 2.5x FY15E EPS of Rs41.7 and Rs60.4, respectively. On EV/EBITDA, it is trading at 2.7x FY14E and 2.2x FY15E and on EV/tonne, it trades at US$42.9FY14E and US$37.9FY15E. We maintain Buy on the stock with a one-year price target of Rs284.

Source : Equity Bulls

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