Firming Up Fast - Mangalam Cement

With this year’s excellent monsoon now on its way out and the thrust of the Indian government on infrastructure development, one sector that is definitely going to be of fancy for the investors in the coming quarters is cement. Moreover, the recent firmness in the price of cement in the southern market - where there was the hangover of excess supply - has given new life to cement companies whose share prices have largely underperformed the broader market index in the last six months. But going forward the situation will reverse and one company that is our top pick from the cement pack is Mangalam Cement (MCL). Though this may not be a multi-bagger that will double in the next few months it will definitely give the required stability to your portfolio with reasonable returns. The reason for this lies in the better dividend yield of 4 per cent at its current share price and the future growth plans of the company.

Currently MCL has a total cement capacity of 2 MTPA and it will be adding another 1.75 MTPA at a cost of approximately Rs 735 crore to make it operational by September 2012. This will boost the volume growth of the company. Apart from this, MCL is also doing capex to increase its captive power plant generation capacity to 39.5 MW from its current 22 MW at a cost of approximately Rs 80 crore. Out of this total of 39.5 MW, MCL will require only 25 MW to meet its plant requirement and the rest will be sold to the state grid at merchant rates.

Currently, the merchant rate is more than Rs 8 per unit against the cost of production at Rs 3 per unit. Also, MCL has successfully commissioned its six new wind mills in Jaisalmer. With this its total capacity of wind mill power has increased to 13.65 MW. Electricity generation from this farm will make the company eligible for earning carbon credits of 22,500 units per year, which could be sold in the market generating one more stream of revenue for the company. As far as the company’s funding of capex is concerned it will be managed through a combination of internal accrual and debt. Currently MCL has a debt equity ratio of just 0.04 that provides a lot of scope for the company to leverage its balance-sheet.

As far as the company’s financials are concerned, in Q1FY11 the sales of MCL declined by 14.3 per cent on a YoY basis to Rs 133.76 crore. The decline in topline was mainly due to a decline in blended sales volume and realisation that slipped down by 1.9 per cent and 12.6 per cent respectively on a yearly basis. Going forward we feel that both the concerns of volume and realisation will ease out as the monsoon is over now and the logistical issue that the company faced during the last quarter in terms of non-availability of railway wagons has also subsided.

In terms of valuation, MCL is currently available at EV of USD 41per tonne which is almost at 50 per cent discount to its replacement cost and at 40 per cent discount to the other listed players. We believe that the worst is over for the cement stocks now and as infrastructure activity picks up, the demand for cement will be revived. A company like MCL, which is available at such attractive valuation and high dividend yield, will lend stability to your portfolio.