Higher cost pressurises margins… • Mangalam Cement:: ICICI Securities, PDF link

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Higher cost pressurises margins…
• Mangalam Cement’s Q2FY15 operating profits were impacted by
higher operating costs (fuel & freight) that kept margins lower at 9%
vs. our expected OPM margin of 14.1%, although revenue growth
remained robust backed by new capacity expansion and strong
demand in the northern regions
• Revenues were up 64.1% YoY to | 237.8 crore (I-direct estimate:
| 224.7 crore) led by 55.1% YoY growth in volumes (0.64 MT) while
realisations increased 5.9% YoY to | 3716/tonne
• However, a low operating margin and higher interest cost led to
lower-than-expected growth in net profit during the current quarter
Small player with presence in strong northern and central regions
Mangalam Cement has always remained a laggard in terms of capacity
expansion. However, a presence in the strong northern region has always
aided it to keep utilisation at healthy levels. At present, the company sells
~95% of its cement production in the north while the remaining volume
is sold in the central region. Both northern and central regions have high
demand compared to other regions. For FY11-14, cement consumption
grew at 5.4% CAGR in Northern India and 7.2% CAGR in the central
region compared to 5.1% CAGR in all-India consumption. Going ahead
also, the demand environment is expected to remain robust in these
regions resulting in a favourable environment for Mangalam Cement.
Commissioning of new capacity to drive volume growth
The new cement mill with a capacity of 1.25 MTPA has commenced
commercial production from the end of May 2014. With this, the total
cement capacity of the company has reached 3.25 MTPA from the current
capacity of 2.0 MTPA. Clinker capacity is also expected to increase to 2.21
MTPA from the current 1.71 MTPA. The company expects to utilise the
new capacity at more than 90% within six months of commissioning,
which will drive the growth of the company in coming years. Existing
capacity of the company is also being utilised at more than 90% level.
Availability of captive power plant to lead to higher margins
Against the present requirement of 23 MW power, the company has
captive power plants of 35 MW. On many occasions, Mangalam has to
keep one plant idle as the rates offered by the Government of Rajasthan
and also on energy exchange for purchase of power produced by the
company were unprofitable. On increase in production of clinker capacity
by 0.5 million TPA and new grinding unit by 1.25 million TPA, 100%
captive capacity is expected to be utilised.
Earnings growth momentum to continue; maintain BUY
At the CMP of | 262, the stock is trading at 5.6x its FY16E and 3.7x its
FY17E EV/EBITDA respectively. On an EV/tonne basis, the stock is trading
at $49 on capacity of 3.25 MT, which is at ~35% discount to its midcap
peers. This leaves much scope for appreciation over the longer term
despite the sharp rally in stock prices over the last month. Given the
improving demand scenario coupled with the capacity expansion of 1.25
MT from Q1FY15E, we expect profitability growth to remain healthy over
the next two or three years. Hence, we continue to maintain our BUY
recommendation on the stock with a target price of | 322/share (i.e. at
4.5x FY15E EV/EBITDA, $60/tonne on capacity of 3.25 MT).

LINK

http://content.icicidirect.com/mailimages/IDirect_Mangalam_Q2FY15.pdf