Stock Pick From The Cement Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a leading cement manufacturing company.

Mangalam Cement - A Strong Base

HERE IS WHY

• The company has a consistent dividend paying history. For FY12, its dividend yield stands at 4.19 per cent at its CMP
• Its topline witnessed a growth of 27 per cent over FY11 to touch Rs 622 crore in FY12, while its operating profit grew by 63 per cent to Rs 103 crore.
• Even after adding new capacity, the company’s stock is available at the lowest EV/tonne as compared to the other players.

Though the stock has appreciated significantly, there are compelling reasons for us to recommend Mangalam Cements. A consistent dividend paying history, its capacity expansion plans, good financial performance over the last few quarters and a positive outlook for the cement sector are among the few factors that go in favour of this stock. Its lower valuation is another reason that makes the stock attractive and a good buying opportunity. The company has a consistent dividend paying history, and for FY12, it paid a dividend of Rs 6 per share, resulting in a dividend yield of 4.19 per cent at its current market price. Moreover, the government’s thrust on higher infrastructure spending will be a major growth driver in the coming years. Mangalam Cement is an integrated cement manufacturing company based in north India. It primarily caters to the markets of Rajasthan, Madhya Pradesh, Haryana and western Uttar Pradesh. The company has a capacity to manufacture 2 million tonnes of cement a year of capacity and a coal-based power plant to generate 35 MW of power for captive consumption.

On the financial front, its topline witnessed a growth of 27 per cent over FY11 to touch Rs 622 crore in FY12, while its operating profit grew by 63 per cent to Rs 103 crore. This was mainly due to a lower base effect and a pickup in volumes (up by nine per cent) especially in the second half of FY12. What further helped was a rise in the cement prices/realisations, which increased by 17 per cent from FY11 to Rs 3423 per tonne. The demand for cement mainly came up in the second half of FY12 from a revival in infrastructure and construction activity on the back of elections in the northern states. The company did well on the margins front too, with its EBITDA improving by 400 basis points to 16.4 per cent against the same period last year. The improvement in the EBITDA margins was also on the back of the newly-commissioned 17.5 MW captive power plant, taking the total capacity to 35 MW and helping the company to increase its operational efficiency.

According to R C Gupta, the president of the company, demand growth in the coming years will come from the government’s focus on infrastructure and elections that are scheduled in 2014. Anticipating higher demand in the coming years, the company is in the process of commissioning another 1.2 MTPA cement plant by the second half of 2012, taking its total capacity to 3.2 MTPA. The company is also increasing its clinker capacity by 0.5 MTPA, taking its total clinker capacity to 2.2 MTPA. This will start contributing to the company’s revenues from H2CY13. The company’s capex is estimated at Rs 500 crore, funded through Rs 300 crore of debt and Rs 200 crore of internal accruals. The best part about recommending Mangalam Cement is that even after adding new capacity, the company’s stock is available at the lowest EV/tonne as compared to the other players. The EV/tonne of the company stands at Rs 1795 against that of UltraTech (Rs 10171), ACC (Rs 9281), JK Cement (Rs 2671) and Madras Cements (Rs 5594). At a CMP of Rs 143, it is trading at a PE of 6.81x with its FY12 EPS of Rs 21. Given the kind of growth that we expect in the earnings from the new capacity addition, coupled with improving demand due to higher infrastructure spending from the government and higher cement prices, we recommend that investors buy this scrip with an upside potential of 15-20 per cent in the next one year.