Riding the Infra Boom

Mangalam Cement operates in northern markets where demand is still strong due to a plethora of government-funded projects AMRITESHWAR MATHUR ET INTELLIGENCE GROUP  MANGALAM Cement – part of the BK Birla Group – has grown aggressively over the past three years, thanks to robust demand conditions. The octogenarian industrialist had recently willed this company to granddaughter Vidula Jalan. However, his grandson Kumarmangalam Birla, who will inherit BK Birla controlled Kesoram Industries and Century Textiles, will own a 17.7% stake in Mangalam Cement via these entities and account for a significant portion of the promoter holding.      The Mangalam Cement stock is possibly one of the cheapest in the sector right now, trading at just 2.6 times its trailing 12 months earnings. Also, it trades at just 1.2 times its book value for the year ended March '09, coupled with a high dividend yield of 4.6%. This stock provides an attractive investment opportunity for long-term investors.  CAPACITY & EXPANSION PLANS  Mangalam's capacity was 2 million tonne at the end of FY 09, double the level from two years ago. The company invested Rs 198.6 crore as capex during this period and its cash flow was Rs 277 crore. Despite the capex, Mangalam Cement's leverage ratio was just 0.17 at the end of March '09, compared to 0.48 two years earlier.      Its key markets are Rajasthan, UP and Delhi, where demand conditions have remained strong thanks to governmentfunded projects and rural housing projects, and price realisations have also remained higher on a y-o-y basis. The board of Mangalam Cement had earlier given its in-principle approval for setting up a new cement plant with a capacity of 1.5 million tonne at its existing plant site in Rajasthan's Kota district. In addition, the company plans to set up a captive power plant with a capacity of 17.5 MW, for which it has placed orders.      The cost of this expansion project is estimated at Rs 750 crore, which would be financed via internal accruals to the tune of Rs 300 crore and the remainder by debt. Given the strong cash flows of Mangalam Cement, financing this project over the next two years should not be a problem.  FINANCIALS  The company's operating profit margin rose by 1,460 basis points y-o-y to 36.2% in the September '09 quarter, helped by its realisation that improved an estimated 23.2% y-o-y to Rs 3919 per tonne. However, the company's total despatches declined 2.1% y-o-y to 423,000 tonne in the second quarter of FY 10.      Compared to its peers, Mangalam Cement has handled its operational costs quite efficiently. For instance, in the year ended March '09, the company spentnearly Rs 831 per tonne on power & fuel costs. The corresponding figure for Shree Cement and JK Cement was Rs 781.6 per tonne and Rs 1,000 per tonne, respectively, for FY 09. Also, while Mangalam Cement has reported a decline in its power cost over last three years, its other two peers have reported a rise.  VALUATIONS  At Rs 120.4, Mangalam Cement trades with a P /E of just 2.6 times its trailing earnings. Binani Cement, on the other hand, trades at 5.4 times while JK Cement trades at 3.9 times. Investors could consider Mangalam Cement for long-term investment.      amrit.mathur@timesgroup.com