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Sushil Finance

5.30 AM Jan 1st 1970

Mangalam Cement

BSE ID : 502157     NSE ID : MANGLMCEM

RECOMMENDED PRICE 290.85

PEAK FROM RECO 543.00 86.69%

CURRENT PRICE 731.05 Resource id #18

We believe Mangalam Cement has room for re-rating and recommend BUY on the stock with a target price of Rs 425.

Mangalam Cement

 

Intermediate capex over...capacity increased by 63 percent over FY14-15:

Recently the company completed its on going expansion of 1.25 MnT p.a grinding unit at Morak (Rajasthan) at a capex of Rs 5000 Mn, taking the grinding capacity to 3.25 MnT up 63 percent YoY and clinker capacity from 1.8 MnT to 2.3 MnT, up 28 percent YoY. The company doesn't have any immediate capex plan, however, it has surplus land at Aligarh which can be used for expansion. We believe the strong balance sheet gives an added advantage when the management intends to go for further capex.

 

Volume growth to be driven by new capacity:

Recent capacity expansion will help strong volume growth in FY15, up 32 percent to 2.53 MnT (1.9 MnT in FY14). For FY16 and FY17 we expect volume growth of 12.4 percent and 5.3 percent respectively. We expect the old 2 MnT plant to operate at ~92 percent utilization for FY15 and the new capacity of 1.25 MnT to operate at 55 percent utilization levels, which we expect to improve further to 80 percent in FY16 and 92 percent in FY17. Historically the company has operated its plant at much higher utilization levels compared to the industry with 92 percent and 90 percent in FY13 and FY14 respectively.

 

Revenue to report 21 percent CAGR over FY14-17.....while EBITDA to grow four fold over the same period ( 61 percent CAGR):

We expect revenue CAGR of 21  percent over FY14-17E on the back of 15.9 percent volume CAGR and 4.3 percent realization CAGR. We expect realization to improve by 4 percent/4 percent/5 percent over FY15/16/17. Higher capacity utilization coupled with lower cost inflation and operating leverage will help EBITDA/ Ton to improve from Rs 292/ Ton in FY14 to Rs 520/725/800/Ton in FY15/16/17 respectively. EBITDA margin is expected to improve from 8 percent in FY14 to 13.7 percent/18.4 percent/19.3 percent in FY15/ FY16/FY17.EBITDA is expected to grow more than fourfold to Rs 2392 Mn by FY17 from Rs 557 Mn in FY14. In FY12/13 the company had reported EBITDA /Ton of Rs 632/709. ? The average lead distance of Mangalam is around 500 Km , little higher than the industry standard of 400-450 km. The new plant also has come up at the same location so there is no scope for improvement in the same. However, higher demand in the local market can result in lower freight cost and can contribute to EBITDA/ ton.

 

Strong cash flows over FY14-17 will enable reduction in debt/capex:

Mangalam was debt free till FY12, after which it raised debt for its 1.25 MnT capex plan and currently the net debt of the company stands at ~Rs.2,500 Mn. We expect the company to generate Rs. 1735 mn of free cash over the FY14-17 and this will help in either reduction in debt or go for further capex. The current debt: equity stands at 0.7x (FY14), which is further likely to improve to 0.5x by FY17, assuming no repayment of debt.

 

Outlook and Valuation:

At the CMP of Rs.290.85 the stock is trading at 7.8x its F16E and 6.3XFY17E EPS, and 5.1x FY16 and 4.1x FY17 EV/EBITDA. At EV/ Ton of USD 51(FY17E), we believe the stock has room for re-rating and recommend BUY on the stock with a target price of Rs 425, implying 40 percent upside. At the target price the stock would trade at USD 65/ Ton. The stock is trading at a 50 percent discount to mid sized cement players and more than 70 percent discount to large players in the listed space. We believe the strong return ratios and unleveraged balance sheet should result in re-rating in the stock.

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