Result Update Mangalam Cement 16 February 2018 Reuters: MGLC.BO; Bloomberg: MGC IN Higher Operating costs Hurt Performance Mangalam Cement (MGC) reported a weak performance for on account of higher operating costs. MGC reported overall operating costs of Rs3,836/tn, up ~17% YoY because of higher energy and logistics costs. Energy costs increased ~12% YoY to Rs1,120/tn on account of high imported coal (used in pet coke ban tenure) and pet coke prices. Logistics costs rose 15% YoY to Rs1,242/tn because of higher fuel prices and FOR-based sales. However, MGC reported volume of 0.74mt, up ~14% YoY. Realisation rose 9% YoY to Rs3,946/tn, despite the sand mining ban in its key market of Rajasthan. Effectively, overall revenues grew ~25% YoY to Rs2.9bn. However, higher operating cost hurt EBITDA negatively by ~62% YoY to Rs81mn (Rs213mn in ). EBITDA/mt stood at Rs110/tn, down ~67% YoY. MCL s other income stood at Rs70mn, after adjusting with DMF provision reversal, up 254% YoY. Higher other income led MGC to report PAT of Rs27mn (Rs52mn in ), down ~48% YoY. Considering the higher demand in northern region along with higher capacity utilisation plan of MGC, we have retained our Buy rating on MCL with a target price of Rs412 (Rs419 earlier). We have rolled forward our valuation of MGC to FY20E earnings and valued the stock based on FY20E average 6.0x EV/EBITDA and US$50 EV/mt. Higher operating costs: Energy costs increased to Rs1,120/tn,up ~15% YoY. Following the ban on pet coke, MGC switched to imported coal, which costs Rs600/tn to Rs700/tn higher than pet coke. Logistics cost rose to Rs1,242/tn on account of high fuel prices and FOR-based sales. Overall operating costs stood at Rs3,836/tn, up ~17% YoY. However, operating costs are expected to decrease because in they were impacted by nonavailability of fly ash at Aligarh plant, which is likely to be resolved in the near future. Change in our estimates: Considering the demand outlook in northern region (key market of MCL) and past performance of MGC, we have cut our earlier aggressive earnings estimates for FY18/FY19/FY20 by 48%/39%/27%, respectively. Our revised EBITDA/PAT estimates are Rs1.25bn/Rs285mn, Rs1.54bn/Rs518mn and Rs1.91bn/Rs835mn for FY18/FY19/FY20, respectively. Outlook: MCL is one among the cement stocks available at a reasonable discount on both EV/EBITDA and EV/mt fronts currently. Considering the robust volume with expectation of higher capacity utilisation level in future and likely commissioning of waste heat recovery or WHR plant to help control costs, we feel structurally the performance of MCL leaves scope for improvement. Hence, we have retained Buy rating on MCL with a revised target price of Rs412 ( Rs419 earlier) BUY Sector: Cement CMP: Rs356 Target Price: Rs412 Upside: 16% Harshit Dhoot Research Associate harshit.dhoot@nirmalbang.com +91-22-6273 8111 Key Data Current Shares O/S (mn) 26.7 Mkt Cap (Rsbn/US$mn) 9.6/150.7 52 Wk H / L (Rs) 480/277 Daily Vol. (3M NSE Avg.) 57,160 Price Performance (%) 1 M 6 M 1 Yr Mangalam Cement (20.4) 25.1 Nifty Index (1.4) 6.5 20.1 Source: Bloomberg Y/E March (Rsmn) YoY % QoQ % 9MFY18 9MFY17 YoY% Net sales 2,920 2,338 25 2,373 23 7,834 6,497 21 Total expenses 2,838 2,125 34 2,100 35 7,074 5,567 27 EBITDA 81 213 (62) 273 (70) 760 930 (18) EBITDA margin (%) 2.8 9.1 (632bps) 11.5 (873bps) 9.7 14.3 (461bps) Other income 70 20 254 30 130 128 63 104 Interest costs 116 116 (0) 117 (1) 367 331 11 Depreciation 113 106 7 110 3 328 300 9 PBT post exceptional items (36) 10 (444) 77 (147) 235 361 (35) Tax (63) (42) - 62-75 45 - PAT 27 52 (48) 15 82 160 317 (49) Adjusted profit 27 52 (48) 15 82 160 317 (49) Source: Company, Nirmal Bang Research
Key conference-call highlights Capacity utilisation of Morak plant was healthy at ~73%, but Aligarh plant s (100% PPC plant) capacity utilisation was ~60% because of non-availability of fly ash following lower plant load factor of the power unit at the UP grinding plant. Aligarh/s capacity utilisation level is likely to rise as fly ash availability improves. Apart from improved Capacity Utilisation, MGC s management pointed towards savings of Rs400/tn in sourcing fly ash once the fly ash availability normalises (earlier sourcing stood at Rs800/tn). Total volume of MGC for the quarter was ~0.74mt - out of which ~0.11mt was contributed by Aligarh plant and ~3mt by Morak plant. The region-wise volume of MGC was 31% in Rajasthan, 35% in Uttar Pradesh, 26% in Madhya Pradesh, 6% in Delhi and the rest from other markets. MGC s trade and nontrade mix was at 65%:35%. MGC proposed to commission WHR plant with 11MW capacity by FY20. WHR is expected to cost ~Rs1bn which will be funded as follows: Rs200mn Rs250mn from internal accruals and ~Rs750- Rs800mn funded through debt. Currently, net debt stands at ~Rs3.40bn. The management indicated that energy costs were higher because of the use of imported US coal in kilns (100% pet coke usage earlier) during the brief phase of pet coke ban which cost ~Rs600/tn to Rs700 /tn higher than pet coke. After the ban was lifted, MGC migrated back to using pet coke. Freight costs increased because of fuel costs and FOR-based sales. Rail road mix of MGC was ~60%:40%. Lead distance of Morak plant was ~300km. 2 Mangalam Cement
Exhibit 1: Detailed financials (Rsmn) YoY % QoQ % E Deviation % 9MFY18 9MFY17 YoY% Net sales 2,920 2,338 25 2,373 23 2,679 9 7,834 6,497 21 Expenditure 0 Chg. in stock 184 (158) - (100) - (58) - (26) 14 - Raw material costs 475 478 (1) 483 (2) 553 (14) 1,400 1,072 31 Purchase of traded goods - - - - - - - - - - Employee costs 211 216 (2) 217 (3) 227 (7) 645 576 12 Freight costs 919 698 32 712 29 815 13 2,355 1,882 25 Power and fuel expenses 829 647 28 599 38 706 17 2,042 1,467 39 Other expenses 221 243 (9) 190 17 197 12 658 555 19 Total expenses 2,838 2,125 34 2,100 35 2,442 16 7,074 5,567 27 EBITDA 81 213 (62) 273 (70) 237 (66) 760 930 (18) EBITDA margin (%) 2.8 9.1 (632bps) 11.5 (873bps) 8.8 (68) 9.7 14.3 (461bps) Other income 70 20 254 30 130 32 122 128 63 104 Interest costs 116 116-117 (1) 121 (4) 367 331 11 Depreciation 113 106 7 110 3 114 (1) 328 300 9 PBT post exceptional items (36) 10 (444) 77 (146) 34 (207) 235 361 (35) Tax (63) (42) - 62-8 - 75 45 PAT 27 52 (48) 15 82 25 6 160 317 (49) Adjusted profit 27 52 (48) 15 82 25 6 160 317 (49) Source: Company, Nirmal Bang Research Exhibit 2: Operational details YoY % QoQ % E Deviation % Volume (mnmt) 0.74 5 14.6 0 22.5 8 9.1 EBITDA (Rs/mt) 110 330 (66.6) 453 (75.7) 349 (68.5) Source: Company, Nirmal Bang Research Exhibit 3: Trend in operating costs/mt Costs per mt (Rs) YoY % QoQ % Chg. in stock 306 (278) 287 (3) (245) 240 (173) (166) 248 - - Raw material costs 535 709 461 662 740 527 701 800 642 (13.3) (19.8) Purchased goods 247 159 - - - - - - - - - Freight costs 972 1,062 1,034 1,173 1,081 1,087 1,149 1,178 1,242 15.0 5.4 Employee costs 269 225 301 374 335 293 344 359 286 (14.8) (20.4) Power and fuel exp. 712 672 635 916 1,002 762 975 992 1,120 11.8 12.9 Other expenses 277 277 209 389 377 408 393 314 299 (20.8) (4.9) Total expenses 3,317 2,825 2,927 3,510 3,290 3,317 3,390 3,477 3,836 16.6 10.3 Source: Company, Nirmal Bang Research 3 Mangalam Cement
Exhibit 5: Key changes to our estimates (Rsmn) Exhibit 4: Actual performance versus estimates Rsmn Actual Estimate Deviation (%) Volume (mt) 0.74 8 9.1 Realisation (Rs/mt) 3,946 3,949 (0.1) Net sales 2,920 2,679 9.0 Operating profit 81 237 (65.6) EBITDA (Rs/mt) 110 349 (68.5) Net profit 27 25 6.1 Source: Company, Nirmal Bang Research Old New Change (%) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Net sales 10,893 12,470 14,478 10,739 12,294 14,273 (1.4) (1.4) (1.4) Operating profit 1,573 1,881 2,285 1,245 1,541 1,909 (20.8) (18.1) (16.4) Net profit 542 807 1137 285 518 835 (47.5) (35.8) (26.6) EPS (Rs) 20.3 30.2 42.6 10.7 19.4 31.3 (47.5) (35.8) (26.6) Target price (Rs) 419 412 Rating BUY BUY Source: Company, Nirmal Bang Research Exhibit 6: Earnings-based valuation Particulars (Rsmn) FY20E EBITDA 1,909 Target multiple (x) 6.0 Enterprise value 12,219 Less: Net debt 2,139 Equity value 10,080 No. of shares (mn) 26.7 Value per share (Rs) 378 Source: Company, Nirmal Bang Research Exhibit 7: Asset-based valuation Particulars (Rsmn) FY20E capacity 4.0 Target EV/mt (US$) 50 Enterprise value 14,040 Less: Net debt 2,139 Equity value 11,901 No. of shares (mn) 26.7 Value per share (Rs) 446 Source: Company, Nirmal Bang Research Exhibit 8: Target price of Rs412 based on the average of both valuation methodologies Particulars (Rs) Value based on earnings multiple 378 Value based on asset valuation 446 Average value per share 412 Target price 412 CMP (Rs) 356 Upside (%) 16 Source: Company, Nirmal Bang Research 4 Mangalam Cement
Exhibit 9: High growth in volume on account of increase in non-trade sales 0.8 0.8 0.7 0.7 0.5 0.5 0.4 0.4 0.3 0.5 0.5 0.7 0.7 3 25.0 15.0 1 5.0 (5.0) (1) (15.0) Exhibit 10: Realisation rises YoY, despite sand mining ban in Rajasthan 4,500 4,300 4,100 3,900 3,700 3,500 3,300 3,100 2,900 2,700 2,500 15.0 1 5.0 (5.0) (1) (15.0) () Volumes (mn mt) Realisations (Rs/mt) Source: Company, Nirmal Bang Researc Exhibit 11: High operating costs hurt EBITDA/mt 900 800 EBITDA/mt 795 700 642 600 544 495 500 422 453 400 322 330 300 200 172 168 100 14 - -100-34 110 Source: Company, Nirmal Bang Research Exhibit 12: Operating costs expected to decline on account of future availability of fly ash 4,100 3,900 3,700 3,500 3,300 3,100 2,900 2,700 2,500 25.0 15.0 1 5.0 (5.0) (1) (15.0) () (25.0) Operating costs/mt (Rs) Source: Company, Nirmal Bang Research Exhibit 13: Freight costs up becauseof high fuel prices and FOR-based sales 1,300 1,200 1,100 1,000 900 800 700 15.0 1 5.0 (5.0) (1) (15.0) () Source: Company, Nirmal Bang Research Exhibit 14: Power and fuel costsup on account of high pet coke and coal prices 1,300 1,200 1,100 1,000 900 800 700 600 10 8 6 4 () (4) (6) Freight costs/mt (Rs) Power & Fuel costs/mt (Rs) Source: Company, Nirmal Bang Research Source: Company, Nirmal Bang Research 5 Mangalam Cement
Financials Exhibit 15: Income statement Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net sales 8,418 9,086 10,739 12,294 14,273 Raw material costs 1,358 1,437 1,874 2,145 2,409 Employee costs 725 779 805 922 1,056 Freight costs 2,502 2,634 3,045 3,453 3,879 Power and fuel expenses 1,776 1,994 2,338 2,701 3,093 Other expenses 870 846 850 964 1,093 Total expenses 7,971 7,872 9,494 10,753 12,364 Operating profit 447 1,214 1,245 1,541 1,909 OPM (%) 5 13 12 13 13 Other income 70 146 140 85 120 Interest costs 459 475 497 437 400 Depreciation 367 403 481 499 516 PBT (309) 482 407 690 1,113 Tax (99) 138 122 173 278 Tax rate (%) 32 29 30 25 25 Adjusted profit (210) 344 285 518 835 EPS (Rs) (7.9) 12.9 10.7 19.4 31.3 Source: Company, Nirmal Bang Research Exhibit 16: Cash flow Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E PAT (210) 344 285 518 835 Add: Depreciation 367 403 481 499 516 Chg in NWC 799 653 (95) (47) (59) Cash flow from operations 955 1,400 671 970 1,291 Capex (644) (875) (500) (500) (500) Net cash flow after capex 160 (85) - - - (484) (960) (500) (500) (500) Issue of shares - - - - - Inc. in debt 52 (505) (100) (150) (300) Inc. in DTL (451) 85 - - - Dividend paid (64) (64) (64) (64) (64) Cash flow from financing (463) (484) (164) (214) (364) Net cash flow 8 (44) 7 256 427 Opening cash balance 287 295 251 258 514 Closing cash balance 295 251 258 514 941 Source: Company, Nirmal Bang Research Exhibit 17: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Equity capital 267 267 267 267 267 Reserves and surplus 4,466 4,793 5,219 5,718 6,524 Net worth 4,732 5,060 5,486 5,985 6,791 Total debt 3,499 2,994 3,502 3,352 3,052 Deferred tax liability 331 368 523 523 523 Total liabilities 8,563 8,423 9,511 9,860 10,366 Gross block 7,809 8,903 13,747 14,247 14,747 Acc. Dep. 367 768 5,177 5,676 6,192 Net block 7,443 8,136 8,570 8,572 8,556 CWIP 709 488 - - - Investment 195 281 356 356 356 NWC-cash (79) (732) 322 369 428 Cash 295 251 263 563 1,027 Total assets 8,563 8,423 9,511 9,860 10,366 Source: Company, Nirmal Bang Research Exhibit 18: Key ratios Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Growth (%) Sales (8.5) 7.9 18.2 14.5 16.1 Operating profit (49.3) 171.7 2.6 23.8 12.3 Net profit (198.6) (263.3) (17.1) 81.9 14.5 Leverage (x) Debt-equity 0.74 0.59 4 0.57 0.46 Net debt-equity 8 0.54 0 0.49 0.32 Profitability (%) OPM 5.3 13.4 11.6 12.5 13.4 NPM (2.5) 3.8 2.7 4.2 5.8 RoE (4.2) 7.0 5.3 9.1 13.3 RoCE 0.7 11.1 9.4 12.3 16.3 Valuation (x) P/E (45.4) 27.8 33.4 18.4 11.4 P/BV 2.0 1.9 1.7 1.6 1.4 EV/mt (US$) 57.2 44.4 45.3 44.6 43.3 EV/EBITDA 27.0 9.9 10.2 8.2 6.6 Source: Company, Nirmal Bang Research 6 Mangalam Cement
Apr-15 May-15 Jun-15 Aug-15 Sep-15 Oct-15 Dec-15 Jan-16 Mar-16 Apr-16 May-16 Jul-16 Aug-16 Sep-16 Nov-16 Dec-16 Feb-17 Mar-17 Apr-17 Jun-17 Jul-17 Aug-17 Oct-17 Nov-17 Jan-18 Feb-18 Rating track Date Rating Market price (Rs) Target price (Rs) 15 October 2015 Buy 224 369 13 November 2015 Buy 207 369 6 January 2016 Buy 277 369 9 February 2016 Buy 207 353 9 August 2016 Buy 318 411 9 November 2016 Buy 323 454 14 February 2017 Accumulate 296 294 16 May 2017 Accumulate 344 375 14 August 2017 Accumulate 344 375 16 November 2017 Buy 358 419 16 February 2018 Buy 356 412 Rating track graph 500 450 400 350 300 250 200 150 100 Not Covered Covered 7 Mangalam Cement
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