Mangalam Cement - Poised for growth... - SKP Securities

Mangalam Cement Limited (MCL), promoted in 1978, is a part of BK Birla Group. The company is engaged in the manufacturing of cement and has a capacity of 3.25 mtpa along with 48.65 MW of captive power plant. Its cement and power plants are located at Rajasthan and it sells its product under the brand name of Birla Uttam Cement.

Investment Rationale

Capacity expansion to aid volumes

MCL has recently implemented 0.5 mtpa clinker unit and 1.25 mtpa grinding unit at Morak, Rajasthan at a total cost of ~INR 5 billion. Currently, the plants are run on trail basis while the commercial production will start from December 2013 and the full benefit of the same will accrue from FY15 onwards.

MCL is also exploring new projects the contours of which will be finalized by H2FY14 (surplus land available at Aligarh, UP).

Cost efficiencies to contain significant margin erosion

MCL has reduced its coal and high grade limestone consumption by replacing it by using pet coke. It is not selling any surplus power due to economical loss. The surplus power available will be utilized to meet the incremental power demand generating from recent expansion, thereby leading to overall savings.

Going forward, we expect EBITDA margins to decline from 18.5 percent in FY13 to 17.5 percent in FY15E. Profits margins in FY15 are also expected to be lower compared to FY13 on account of higher depreciation charges and interest outgo.

Attractive valuations & delivering value to share holders

At CMP, MCL is trading at EV/tonne of ~USD 32 & ~USD 30 it's FY14E & FY15E respectively. The EV/tonne multiple is at steep discount (~75 percent) compared to replacement cost and ~55-60 percent compared to midcap peers. Thus, this leaves much scope for appreciation over the longer term once demand improves.

For the last four years, MCL has maintained a dividend rate at 60 percent. For FY13, it has paid a dividend of 60 percent (INR 6/share), thereby delivering a current dividend yield of more than 6 percent. We believe MCL would continue to pay higher dividends, enhancing overall returns of the shareholders.

Valuation

MCL is trading at an EV/EBITDA of 5.1x and 3.3x FY14E and FY15E EBITDA respectively. We valued MCL's business at FY15E EV/EBITDA multiple of 4x and arrived at a price target of INR 149.6/share, implying an upside potential of ~51.1 percent in 18 months. We initiate coverage on MCL with BUY rating.

Source : Equity Bulls

Keywords