Mangalam Cement Ltd. Company Background. Investment Rationale. Valuation. October 3, Poised for growth

Transcription

1 October 3, 213 Mangalam Cement Ltd. Poised for growth CMP INR 99 Target INR Initiating Coverage BUY Key Share Data Face Value (INR) 1. Equity Capital (INR Mn) Week High/Low (INR) 192.8/ months Avg. Daily Volume (NSE) 21,845 BSE Code NSE Code Reuters Code Bloomberg Code Shareholding Pattern (as on 3th June. 213) Others, 68.59% Source: BSE Key Financials (INR Million) MANGLMCEM Promoter 27.41% FII's,.9% DII's, 3.91% MGLC.BO MGC IN Particulars FY12 FY13 FY14E FY15E Net Sales 6,37.7 7,6.4 7, ,366.6 Growth (%) EBITDA 1,34.6 1,36.3 1, ,89. PAT Growth (%) EPS (INR) BVPS (INR) Key Financials Ratios Particulars FY12 FY13 FY14E FY15E P/E (x) P/BVPS (x) Mcap/Sales (x) EV/EBITDA (x) ROCE (%) 14.5% 15.8% 9.% 12.3% ROE (%) 13.5% 16.7% 1.% 13.9% EBITDA Mar (%) 16.4% 18.5% 15.9% 17.5% PAT Mar (%) 8.9% 11.% 6.8% 7.4% Debt - Equity (x) Yr price performance MCL vis-à-vis BSE Small Cap 1% % -1% -2% -3% -4% -5% Oct-12 Jan-13 Apr-13 Jun-13 Sep-13 MCL A Analyst: Nikhil Saboo BSE Small Cap Ph: , M: nikhil.saboo@skpmoneywise.com Company Background 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 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.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 213 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 3 it s FY14E & FY15E respectively. The EV/tonne multiple is at steep discount (~75 percent) compared to replacement cost and ~55-6 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 6 percent. For FY13, it has paid a dividend of 6 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. SKP Securities Ltd Page 1 of 1

2 Industry Overview Cement demand is directly proportional to the construction sector s growth. It is primarily derived from expansions in the housing (6-65 percent) and the infrastructure (2-25 percent) segments. The year FY13 was tough for the cement industry. India s GDP has grown at its slowest pace since 22 and Cement industry which has grown at ~1.1x of GDP growth (average of last 1 years) has been struggling to improve its utilization level due to lower demand (subdued growth in the infrastructure and housing sector) and aggressive capacity addition. The effective installed capacity of Grey Cement increased to over 36 million tonnes (mt) by the end of FY13. However, lower demand and supply glut has resulted in lower capacity utilisation. Exhibit: Effective Capacity Utilization Figs. In MT FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13E Effective Capacity Production Capacity Utilization (%) Source: CMA, SKP Research Even though, India is the second largest cement producer in the world after China, its per capita cement consumption is very low In 212, global cement industry stood at ~4,1 MT, with China accounting for nearly half of the total output. India is the second largest producer with approximately 36 mt of cement (as on FY13). India s per capita consumption is at ~185 kg against the world average of ~48 kg or China s ~1,39 kg. India is way behind the global average per capita consumption and this process of catching up with International average would drive the growth of Indian cement industry. Exhibit: Per Capita Cement Consumption 1,6. 14 Figs. In Kg 1, ~185 ~48. India World Average China Source: Industry, SKP Research SKP Securities Ltd Page 2 of 1

3 Recent growth in the global cement consumption is primarily driven by the emerging markets, generating ~7 percent of the demand Nevertheless, India s growth story is attractive as compared to other advanced and emerging economies. The cement industry is looking for an up-cycle after muted growth for last three years, backed by impetus provided for the housing and infrastructure construction activities in the 12th five year plan period (212-17). The total investment in infrastructure sectors in the 12th five year plan is estimated to be USD one trillion. The recent government measures to fast track infrastructure projects & with general election a year away, construction activity is expected to pick up steam, leading to strong demand for cement. Exhibit: Infrastructure Spending Figs. in INR Billion FY8 FY9 FY1 FY11 FY12 FY13E FY14E FY15E FY16E FY17E Infrastructure Sepnding As a %age og GDP Source: Planning Commission, SKP Research Over the next one year, many of MCL s key cement consuming states are scheduled for elections The demand for cement picks up during the election time, as incumbent Government tries to meet some of the infrastructure related commitments. Over the next one year, besides general election at the Centre, many of MCL s key cement consuming states like Uttar Pradesh (UP), Rajasthan, Delhi, Haryana, Punjab and Madhya Pradesh (MP) etc. are scheduled for elections. These electoral developments will keep demand buoyant till FY15. Exhibit: Forthcoming Elections in MCL's Key Markets Year Expected Month State 213 Nov - Dec Delhi 213 Nov - Dec Rajasthan 213 Nov - Dec Madhya Pradesh 214 June Centre (Lok Shaba) 214 Sep - Oct Haryana Source: Election Commission of India, Company, SKP Research SKP Securities Ltd Page 3 of 1

4 Company Profile MCL is currently having a capacity of 3.25 mtpa along with MW of captive power plant Mangalam Cement Limited (MCL), promoted in 1978, is a part of BK Birla Group. The company is engaged in manufacturer of cement and has a cement manufacturing capacity of 3.25 million tonnes per annum (mtpa) along with MW of captive power plant. Its cement and 35 MW coal based power plants are located at Morak along with MW wind power plant at Jaisalmer, Rajasthan. It sells its product under the brand Birla Uttam Cement. MCL s presence is spread across Uttar Pradesh (UP), Rajasthan, Delhi, Haryana, Punjab and Madhya Pradesh (MP), primarily catering to the northern and western regions of India through its extensive network comprising 1,124 dealers and 2,796 retailers (FY13). Exhibit: Installed Capacity & Sales Volume Primarily caters to the markets of Rajasthan, Madhya Pradesh, Haryana and western Uttar Pradesh, among others Figs. in MTPA * 2. * 3.25 * FY11 FY12 FY13 FY14E 2.6 FY15E Installed Capacity Sales Volume Note: * Since 1.25 mtpa of capacity is starting commercial production from Dec-13, the benefit of the same will be seen from FY15E onwards SKP Securities Ltd Page 4 of 1

5 Investment Rationale Capacity expansion to aid volumes Incremental capacities will enhance abilities to cater to a wider geography The company has recently implemented.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 213 and the full benefit of the same will accrue from FY15 onwards. The funding for the same has been done through a mix of internal accruals and debt in the ratio of 1:3. So far, MCL has invested ~INR 4 billon and the balance amount of ~INR 1 billion will be spent by March 214. After the completion of the recent expansion plan, MCL s total cement capacity stands at 3.25 mtpa while its clinker capacity is enhanced from 1.71 mtpa to 2.21 mtpa. This capacity will facilitate proximity to key markets in the northern region. Translation of these capacities in to volume growth would help the company to increase its topline growth, even in a softening realization situation. The company 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 substituted the traditional use of coal for the clinkerisation process by using pet coke, enabling cost rationalization and efficient operations Over the last few years MCL has reduced its coal and high grade limestone consumption by replacing the same by using pet coke, thereby leading to cost savings. Pet coke being more homogenous than coal permits steadier kiln operations. To get an interrupted supply of pet coke MCL has entered into a long term contract with Reliance Industries Ltd & Essar Group. The company is also looking at options of importing pet coke for the recent expanded capacity in order to get the benefits of cheaper imported pet coke prices. Currently, MCL 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. We expect EBITDA/tonne to decrease in FY14 to INR 556.5/tonne while an improvement in FY15 to INR 646/tonne on account of better sales realization (demand expected to pick up post State Election in Rajasthan & Delhi). EBITDA margins are likely to decline by 15 bps over FY13-15E to percent. SKP Securities Ltd Page 5 of 1

6 Exhibit: Per Tonne Analysis Particulars FY12 FY13 FY14E FY15E Sales Volume (mtpa) Sales (INR Million) 6, , ,435. 1,243.8 We expect cement EBITDA/tonne of INR 556.5/tonne in FY14E and INR 646/tonne in FY15E Net Realization/tonne 3,413. 3,64.6 3, ,924.8 Total Expenditure (INR Million) 5, , , ,557.6 Material Consumed 1, , ,57.5 Power & Fuel Cost 1, ,6.7 1,88.8 2,643.5 Employee Cost Packing & Distribution 1, , , ,695.3 Admin & Other Exp ,78.1 EBIDTA/tonne Exhibit: EBITDA & EBITDA Margins % 29% 25% 21% 17% 13% 9% FY9 FY1 FY11 FY12 FY13 Figs. in INR Million FY14E FY15E EBITDA EBIDTA Margins (%) Attractive valuation & delivering value to share holders MCL EV/tonne multiple is at steep discount (~75 percent) compared to replacement cost and ~55 percent - 6 percent compared to midcap peers At the CMP of INR 99, MCL is trading at 5.2x & 3.5x its FY14E & FY15E earnings while on a EV/tonne basis it is trading at ~USD 32 & ~USD 3 its FY14E & FY15E (on capacity of 3.25 mtpa) respectively. The EV/tonne multiple is at steep discount (~75 percent) compared to replacement cost and ~55 percent - 6 percent compared to midcap peers. Thus, this leaves much scope for appreciation over the longer term once demand improves. The company has delivered value to its shareholders in the form of higher dividends. The company has a track record of paying continuous dividends since last five years, despite the cyclical nature of the business. SKP Securities Ltd Page 6 of 1

7 For the last four years, the company has maintained a dividend rate at 6 percent. For FY13, the company has paid a dividend of 6 percent (INR 6/share), thereby delivering a current dividend yield of more than 6 percent. Going forward, we believe the company would continue to pay higher dividends, which would enhance overall returns of the shareholders. Going forward, we believe the company would continue to pay higher dividends Exhibit: Dividend Yield % 1% 8% 6% 4% 2% % FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14E FY15E Dividend Per Share Dividend Yield (%) Key Concerns Increasing freight cost Increasing freight costs, augmenting on account of diesel price hike and rising rail freight charges, continue to be a major concern. Despite efforts being made to reduce distances between manufacturing centre and the markets, it still accounts for ~2 percent of the sales, causing cost pressure. Valuations We arrive at a 18 month price target of INR 149.6/share, reflecting an upside potential of 51.1 percent from current levels 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. SKP Securities Ltd Page 7 of 1

8 One Year Forward P/E Band At CMP, MCL is trading at 5.18x and 3.44x its FY14E and FY15E EPS respectively Exhibit: One Year Forward P/E Band Mar-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 8x 7x 6x 5x 4x One Year Forward P/Bv Band Exhibit: One Year Forward P/BV Band 3 25 At CMP, MCL is trading at.5x and.44x its FY14E and FY15E BVPS respectively Mar-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan x 1x.8x.6x.4x One Year Forward EV/EBITDA Band MCL historically traded in a wide band of 2x to 6x on the one year forward EV/EBITDA basis, mainly due to high volatility in earnings due to cyclical nature of cement industry Exhibit: One Year Forward EV/EBITDA Band Figs. In INR Billion Mar-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 6x 5x 4x 3x 2x SKP Securities Ltd Page 8 of 1

9 Exhibit: Income Statement Exhibit: Balance Sheet Particulars FY12 FY13 FY14E FY15E Particulars FY12 FY13 FY14E FY15E Net Sales 6,37.7 7,6.4 7, ,366.6 Share Capital Growth (%) Reserve & Surplus 4,56. 4, , ,56.3 Expenditure 5, , , ,557.6 Shareholders Funds 4, , , ,827.2 Material Consumed 1, , ,57.5 Total Debt ,43.6 3,93.6 4,33.6 Power & Fuel Cost 1, ,6.7 1,88.8 2,643.5 Deferred Tax (Net) Employee Cost Other Liabilities Packing & Distribution 1, , , ,695.3 Total Liabilities 5,23.6 8, ,14.3 1,995.4 Admin & Other Exp ,78.1 EBITDA 1,34.6 1,36.3 1, ,89. Net Block inc Capital WIP 3, , ,56.5 8,244.3 EBITDA Margin (%) Investments Depreciation Oth. Non Current Asset EBIT , ,296.7 Current Assets 2,64. 3, , ,393.5 Other Income Inventories , ,263. Interest Expense Sundry Debtors Profit Before Tax (PBT) , ,38.5 Cash & Bank Balance # # # Income Tax Other Current Asset Effective Tax Rate (%) Loans & Advances 1, ,347.7 Profit After Tax (PAT) Current Liabilities & Prov 1, , , ,211.4 PAT Margin (%) Current Liabilities , , ,848.6 Growth (%) Provisions Diluted EPS Total Assets 5,23.6 8, ,14.3 1,995.4 Exhibit: Cash Flow Statement Figures in INR Million Figures in INR Million Exhibit: Ratio Analysis Particulars FY12 FY13 FY14E FY15E Particulars FY12 FY13 FY14E FY15E PBT , ,38.5 Earning Ratios (%) Depreciation EBITDA Margin (%) 16.4% 18.5% 15.9% 17.5% Interest Provided PAT Margins (%) 8.9% 11.% 6.8% 7.4% Chg. in Working Capital (27.6) (2.8) (61.4) ROCE (%) 14.5% 15.8% 9.% 12.3% Direct Taxes Paid (146.6) (242.5) (179.3) (27.) ROE (%) 13.5% 16.7% 1.% 13.9% Other Charges (59.1) (68.8) - - Per Share Data (INR) Operating Cash Flows ,63.1 1, ,22.6 Diluted EPS Capital Expenditure (449.7) (2,157.1) (3,249.1) (25.) Cash EPS (CEPS) Investments - (344.7) - - BVPS Others Valuation Ratios (x) Investing Cash Flows (41.4) (2,415.1) (3,249.1) (25.) P/E Equity Capital Raised Price/BVPS Inc / (Dec) in Debt - 2,1.8 1,5. 4. EV/Sales Dividend Paid (inc tax) (184.8) (184.9) (187.4) (187.4) EV/EBITDA Interest Paid (31.1) (44.6) (26.6) (343.3) Dividend Yield (%) 4.4% 4.5% 6.1% 6.1% Financing Cash Flows (215.9) 1, ,16. (13.6) Balance Sheet Ratios Chg. in Cash & Cash Eqv (478.4) Debt - Equity Opening Cash Balance Current Ratio Closing Cash Balance ,86.8 Fixed Asset Turn. Ratios # Note: Including other bank balance of INR million & INR million on account of margin money & unpaid dividend accounts. Source: Company Data, SKP Research Figures in INR Million SKP Securities Ltd Page 9 of 1

10 The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Ticker plant and ISI Securities. DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. If you are dissatisfied with the contents of this complimentary document or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using the document and SKP shall not be responsible and/ or liable in any manner. Neither this document nor the information or any opinion expressed therein should be construed as an investment advice or offer to anybody to acquire, subscribe, purchase, sell, dispose of, retain any securities or derivatives related to such securities or an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. Any recommendation or view or opinion expressed on investments in this document is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this document are those of the analyst which are subject to change and do not represent to be an authority on the subject. SKP may or may not subscribe to any and/ or all the views expressed herein. It is the endeavor of SKP to ensure that the analyst(s) use current, reliable, comprehensive information and obtain such information from sources, which the analyst(s) believes to be reliable. However, such information may not have been independently verified by SKP or the analyst(s). The information, opinions and views contained within this document are based upon publicly available information, considered reliable at the time of publication, which are subject to change from time to time without any prior notice. The Document may be updated anytime without any prior notice to anybody. SKP makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or correctness of the information in this Report. SKP, its Directors, affiliates and employees do not accept any liability whatsoever, direct or indirect, that may arise from the use of the information or recommendations herein. Please note that past performance is not necessarily a guide to evaluate future performance. SKP or its affiliates, may, from time to time render advisory and other services to companies being referred to in this document and receive compensation for the same. SKP and/or its affiliates, directors and employees may trade for their own account or may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or on any other committee of those companies or may sell or buy any securities or make any investment, which may be contrary to or inconsistent with this document. This document should be read and relied upon at the sole discretion and risk of the reader. The value of any investment made at your discretion based on this document or income there from may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. Neither SKP nor its affiliates or their directors, employees, agents or representatives/associates, shall be responsible or liable in any manner, directly or indirectly, for information, views or opinions expressed in this document or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the document or inability to use or access our service or this document or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits or any loss or damage that may arise from or in connection with the use of or reliance on this document or inability to use or access our service or this document. SKP Securities Ltd Contacts Research Sales Mumbai Kolkata Mumbai Kolkata Phone Fax researchmum@skpmoneywise.com research@skpmoneywise.com Skp.sec@bloomberg.net Member: NSE BSE NSDL CDSL NCDEX* MCX* MCX-SX FPSB *Group Entities INB/INF: , BSE INB: , CDSL IN-DP-CDSL-132-2, DPID: 218, NSDL IN-DP-NSDL: , DP ID: IN32646, ARN: 6, NCDEX: 715, MCX: 3175, MCX-SX: INE SKP Securities Ltd Page 1 of 1