INDIA: Mangalam Cement appears well-positioned for long term basis

The growth in cement dispatches in the northern region has been broadly stronger than the all-India growth on y-o-y basis, both during FY11 and the June 2011 quarter. This comes at a time when the cement industry has been grappling with a rising cost structure. Also, rising interest rates could hurt demand from housing, in the short term. But the BK Birla controlled-Mangalam Cement appears well-positioned to take advantage of long term opportunities in the North.

BUSINESS

The company is adding capacity, which was 2 million tonnes at end of FY11. Its larger rivals in the North include Shree Cement. Mangalam Cement is expected to shortly complete regulatory formalities related to the merger of BK Birla group companyMangalam Timber Products with itself. Mangalam Timber is engaged in the production of medium density fibre board.

FINANCIALS

Mangalam Cement's operating profit margin declined 430 basis points yo-y to 18.9% in the June quarter, while net sales fell 4.8% to Rs 127.4 crore. The company's realisations improved nearly 3.4% y-o-y on a per tonne basis in first quarter, but that could not prevent its net profit from falling 45.4% y-o-y. Cement prices in New Delhi are currently at Rs 225-230 per bag levels, weaker than a few months earlier given the curtailment of construction activity during monsoon.

GROWTH FACTORS

The company will set up a clinker unit of 1.25 million tonnes in Aligarh, UP. Mangalam is also taking steps to upgrade existing plants to increase clinker production by 0.5 million tonnes. This expansion would be completed over the next 15-18 months, and cement capacity would rise to nearly 3.2 million tonnes. The capex involved would be approximately Rs 300 crore, which will be funded by debt and internal accruals. This capex comes at a time when cement dispatches in the northern region grew an estimated 7.6% y-o-y in FY11, higher than the all-India growth, say analysts.

VALUATIONS

Mangalam Cement trades at a P/E of 9.3 times on a trailing four-quarter basis. Shree Cement trades at more than 30 times. Investors could consider Mangalam Cement on a long term basis.