07/02/2008

Mangalam Cement Ltd

Initiating with a BUY 6mth Price Target: Rs. 170

We are initiating coverage on Mangalam cement with a 6-month price target of

RESEARCH HEAD Rs. 170.
M.R Lalitha

Assisted by Investment Highlights

Aarthi S
Hari Prasad B
Monika Bhandari
Latest quarter performance: The Company’s topline stood at Rs. 119.26
Jayamurugan P Crs for the quarter ended Dec 2007, an increase of 7% on a YoY basis.
The company’s bottomline stood at Rs. 25.75 Crs for the Dec quarter
Industry: Cement 2007, an increase of 26% on a YoY basis. PAT margin has increased from
Price Data 18% to 22%.
Current Price (Rs) 142.05
52 wk range (Rs) 242-105
Expansion plans to drive volumes: The Company increased its capacity
Price Movement Chart from 1.5 Million Tones (MT) to 2 MT and operation would begin from Jan
1600000 300
2008.This would enable the company to boost its topline.

1200000
Cost reduction measures: The measures such as commissioning of 17.5

200 MW captive thermal power plant would boost the bottomline growth.
800000

100

Strong Industry growth: The overall Indian cement industry is expected
400000 to grow by 11% and North India to grow by 9 % for the next 5 years. The
Common Wealth Games 2010 which require infrastructure development
0 0 and ongoing road construction activities will create demand for cement
Jan-07 Apr-07 Jun-07 Sep-07 Dec-07
and will give additional advantage to the company.
Stock Performance
1M 3M 6M
Absolute % (26.2) (28.8) (15) Financial Snapshot
(Rs Crs)
Stock Data Particulars FY05 FY06 FY07
Mkt Cap (Rs Cr) 401.29
Last traded qty (NSE) 18582 Net Sales 302.92 429.49 455.98
No. of shares o/s(Cr) 2.825 Adj PAT 16.77 69.02 83.86
Free float (%) 73.14 Adj PAT Margin (%) 5.54% 16.07% 18.39%
Share holding pattern chart
EPS (Rs.) 5.58 24.43 29.68
Shareholding Pattern as on Dec07
P/E 25.46 5.81 4.79
Mcap/Sales 1.32 0.93 0.88
15% 27% 22%
*FY07 has been annualized

24%

12%
Promoter Private corp
Valuation
Institutions Public
NRI We expect a stronger topline and bottomline growth on the back of improved
demand growth, higher price realisation in northern region, capacity expansion
Key Indicators and savings from captive thermal power plant. At the CMP of Rs. 142.05,
EPS (Rs) TTM 35.72 Mangalam cement is trading at 3.98x its TTM earnings. Compared to the industry
BV per share (Rs) 50.35 average (mid cap cement companies) PE of 9.73x, the stock is highly under
PAT Margin (%) 18.39 valued. We recommend a BUY on the stock with a 6M-price target of Rs.170.

Code
NSE MANGLMCEM
BSE 502157
Reuters honey
MGLC.BO
Bloomberg MGC IN
Cement Production in India (in MT) Industry Outlook

Cement Production in India
Cement consumption has seen double-digit growth continuously for the
last 2 years. By all indications, the growth momentum would continue.
160.00 India’s per capita consumption of cement has grown by 30% to 130 kgs in
120.00
6 years. Compared to other growing economies like Brazil (191 Kgs),
Thailand (366 Kgs), India’s per capita consumption is still lower. This
MT

80.00 reflects the great potential, which the Indian cement industry has.

The Indian economy registered another year of impressive growth, driven
40.00 by the manufacturing sector. Acceleration in the development of various
-
real estate and infrastructure projects resulted in increase in cement
FY03 FY04 FY05 FY06 FY07
consumption.

The infrastructure boom will generate an additional cement requirement
of 50 Million Tones (MT) in next 3 years and about 100 MT in next 5 years.
The capacity addition announcements total to 75 to 80 MT in the course
of next 3 to 4 years. Therefore the growth in capacity would be in
tandem with the cement requirement of the country.

National domestic cement demand has been at 150 MT during 2006-07.
The CAGR of cement consumption has been at around 8.5% during the
last 5 years and 10% during the last 2 years.

The Ministry of Commerce and Industry has projected an average growth
of 8.5% in GDP and 11% growth in cement consumption for the next 5
years.

Cement prices may see a marginal hike this year due to increase in the
input cost. The cost of input (coal, freight) has gone up by 5-6% in 2007,
which is likely to reflect in the cement prices.

Company Profile

Mangalam Cement Ltd’s Net Sales Mangalam Cement was incorporated in 1976, promoted by Kesoram Industries &
Net Sales
Cotton Mills, Century Spinning, Grasim, Pilani Investment Corporation and the
500 Rajasthan State Industrial & Mineral Development Corporation (RIMDC), is a part
450
of the B K Birla group. The company manufactures ordinary portland cement and
400
350
pozzolana portland cement by the dry process, and has its plant in Rajasthan.
300
Rs. Cr.

250 The company has recently commissioned its state-of-the-art new cement plant
200 with German technology for producing 7 lakh tonnes per annum at its existing
150 site.
100
50
- In May 2002, Board for Industrial and Financial Reconstruction (BIFR) had declared
FY05 FY06 FY07 the company as sick company for the accumulated loss of Rs 147 crores in FY02. In
June 2007 BIFR has discharged the company from the provisions of Sick Industrial
*FY07 is annualized
Companies, which showed accumulated profit of Rs 61.9 crore in FY07. Also the
company has benefits accruing from the BIFR, whereby the company is given an
interest rate subsidy of 5%. Hence if the company does go ahead with the capex,
the cost of borrowing for the project will be 5% below the market rates.

The company’s product is marketed under the Brand name “Uttam Birla Cement”
with three-product line viz., 43 grade, 53 grade and PPC.
Investment Rationale

The company’s grinding capacity of 1.5MT is increased to 2MT from Jan
08. The Company has undertaken a project, which would increase
Clinkerisation capacity in Unit-I by 500 tonne per day (TPD) and 250 TPD
in Unit-II. The expanded capacity production results would reflect from
4Q of 2008.

The company has set up a thermal power plant with a capacity of 17.5
MW, which would reduce the power cost by Rs 1.2-1.5 per unit (Rs 115
per tone). This thermal power plant has been commissioned recently and
started producing power. The operation will be in full swing from coming
quarter. As a result the company will be self-sufficient for most of its
power needs and the power cost shall be significantly reduced, thereby
improving the profitability further.

The company’s topline stood at Rs. 449.91 Crs for the 9M FY08, an
increase of 14% on a YoY basis. The PBIDT stood at Rs. 123.12 Crs for 9M
FY08, which is 24% on a YoY basis. The net profit stood at Rs. 79.42 Crs
for FY08, which is 33% on a YoY basis. The PAT margins were up by 4% in
9M FY08 compared to previous 9M.

Peer comparison

Name of the M Cap* Price* Face Value Net Sales PAT Mcap/ EPS P/E
Company (Rs Cr) (Rs) (Rs) TTM (Rs Cr) TTM (Rs Cr) Sales (Rs)
Mangalam Cement Ltd 392.68 139.00 10.00 501.07 100.92 0.78 35.72 3.89
Guj. Sidhee Cem. 391.14 27.05 10.00 400.92 45.77 0.98 3.17 8.55
JK Lakshmi 792.30 139.00 10.00 1,078.02 261.54 0.73 45.88 3.03
Mysore Cement 643.85 40.75 10.00 589.56 45.32 1.09 2.87 14.21
Saurashtra Cem. 240.68 47.10 10.00 436.14 15.29 0.55 2.99 15.74
Sh. Digvijay Cem 545.42 38.60 10.00 242.12 42.36 2.25 3.00 12.88
*As on 06/02/08

Investment Concern

The government monitors cement prices and any change in price may
adversely affect the company’s profit.

The company’s stock performance depends on the market conditions.
Any volatility in the stock market would affect the share price of the
company.
Financial Statements

Income Statement
(Rs Cr)
Particulars FY05 FY06 FY07 9M FY08
Sales 302.92 429.49 227.99 385.06
Total Expenses 268.53 326.05 160.37 266.30
Gross profit 34.39 103.44 67.62 118.76
Other income 4.90 3.72 1.97 4.36
Depreciation 11.68 11.80 6.08 11.71
PBIT 27.61 95.36 63.51 111.41
Interest 10.73 8.60 0.64 1.73
PBT 16.88 86.76 62.87 109.68
Tax 0.11 17.74 20.94 30.26
PAT before Minority interest 16.77 69.02 41.93 79.42
Minority interest - - - -
Reported PAT 16.77 69.02 41.93 79.42
Extraordinary items 1.01 - - -
Adjusted PAT 15.76 69.02 41.93 79.42

Ratio Analysis
Profitability Ratios
Gross profit margin 11.35% 24.08% 29.66% 30.84%
EBIT/sales 9.11% 22.20% 27.86% 28.93%
Other Inc/Sales 1.62% 0.87% 0.86% 1.13%
Net profit margin 5.20% 16.07% 18.39% 20.63%
Tax Rate 0.65% 20.45% 33.31% 27.59%
Valuation Ratios
EPS (annualized) 5.58 24.43 29.68 37.48
BVPS (annualized) 13.42 37.85 50.35 87.83
Mcap/Sales 1.32 0.93 0.88 0.78
P/E 25.46 5.81 4.79 3.79
Price/BV 10.59 3.75 2.82 1.62

* Accounting period for the company has been changed from September to March
with effect from FY07 and FY07 consist only six months.
 Balance Sheet
(Rs Cr)
Particulars FY05 FY06 FY07
SOURCES OF FUNDS
Share Capital 28.25 28.25 28.25
Equity 28.25 28.25 28.25
Preference - - -
Reserves and Surplus 15.36 84.17 119.44
Minority Interest - - -
Secured Loans - 17.00 51.70
Unsecured Loans 103.70 26.70 24.86

TOTAL LIABILITIES 147.31 156.12 224.25

APPLICATION OF FUNDS
Gross Block 284.41 292.55 300.96
Less: Accumulated Depreciation 173.49 185.37 190.98
Net Block 110.92 107.18 109.98
Capital Work in Progress 1.81 21.35 84.19
Investments 1.10 1.10 1.10
Current Assets, Loans and Advances
Inventories 29.45 34.17 43.19
Sundry Debtors 8.71 3.15 3.35
Loans and Advances 15.04 34.41 40.15
Cash and Bank Balances 6.70 10.83 25.15
Total Current Assets 59.90 82.56 111.84
Current Liabilities
Sundry Creditors 15.71 12.06 11.62
Other liabilities 7.00 4.28 4.33
Provisions 4.67 14.05 27.67
Total Current Liabilities 26.42 38.57 57.67
Deffered Tax Asset - 10.46 1.78
Deffered Tax Liability - 27.96 26.97
Net Deferred tax - (17.50) (25.19)

TOTAL ASSETS 147.31 156.12 224.25

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directors or employees are responsible for any errors inadvertent or otherwise, and for any investment or divestment decision taken based on
its recommendations. Our company or an associate company or firm, their employees may hold positions and / or transact in the instruments
mentioned herein.
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