is the flagship company of B. K. Birla group engaged in the business of manufacturing and selling of cement and clinker. The company’s manufacturing units are located in Kota, Rajasthan. It mainly caters to fast growing markets of Western UP, Rajasthan, Delhi and MP.

INVESTMENT RATIONALE:

Capacity expansion to boost much needed volume growth: The company is increasing its cement manufacturing capacity by 1.5mtpa at its existing site by Dec’2012. Full effect of capacity expansion is likely to seen in FY’14.

Power selling revenues to cushion the margins: The company is increasing its power generating capacity by 17.5mw by Dec’2010. Post expansion, MCL’s total capacity would reach 35mw. The company needs 25mw to meet its 100% power requirement. The surplus power generated from CPPs would be use for merchant sale, generating additional income for the company. We are expecting MCL to sell 813lacs unit and 716lacs unit in FY’12?13E respectively.

Valuation: At current market price of `164, stock is trading at a PE of 4x discounting trailing four quarters EPS, EV/EBIDTA of 5.4x and EV/tonne of $49 discounting FY’11E earnings and capacity respectively.

We are initiating our coverage on the company with ‘HOLD’’ rating. We have arrived at a target price of `174 for the company by valuing it at EV/EBIDTA of 5x and PE multiple of 5x discounting FY’12E EBIDTA and EPS respectively.

Company background

Mangalam Cement Ltd. (MCL) started its operations in 1978 and is engaged in manufacturing of cement and clinker. The company is having aggregate capacity of 2MTPA.

MCL is mainly catering to fast growing markets of Rajasthan, UP and NCR region. It markets its products under the brand ‘Birla Uttam Cement’ and major chunk of revenues comes from Rajasthan (30%).

The board of Mangalam cement is headed by Chairman, Shri O.P. Gupta. The senior management team of the company has distinguished experience and well?versed knowledge about the industry owing to which it has been able to sail through bad patches of industry despite a small player.

Capacity expansion to drive volume growth

The company is expanding its capacity by 1.5mtpa to 3.5mtpa by FY’13 end. The company is laggard in the volume rally from past 3?4 quarters; hence, capacity expansion is expected to boost the volume growth of the company. We expect the company to report 4% CAGR growth in its volume over FY’10-13E.

CPP expansion to be beneficial

The company is setting up 17.5mw captive power plant by Dec’2010, taking its total capacity to 35MW. Post expansion, MCL would be in a position to fulfill 95% of its power requirement for expanded capacity. Currently, the company is fulfilling 70% of its power requirement through CPPs and balance 30% through open market purchases at `4.3/unit.

On account of CPP, the company is likely to save `15/tonne in FY’11E even after assuming 10% hike in coal prices.

Capex

As stated earlier, the company is expanding its cement manufacturing capacity by 1.5mtpa by FY’13 and power generating capacity by 17.5mw by Dec’2010. The total capex for the project is `800cr and it would be finance through mix of debt and internal accruals.

Financial Performance in Q1FY’11

Top-line plummeted by 14%: MCL’s Top-line plummeted by 14% y/y to `133cr mainly on account of de-growth in realizations and despatches. Net realizations of the company came down by 13% y/y and 9% q/q to `3,136/tonne mainly on account of higher sales of clinker.

Operating profit tang down: Operating profit of MCL decreased by 45% y/y and 26% q/q to `31cr mainly on account of de-growth in Top-line and increasing input costs. Operating profit margin come down by 13.5% to 23.2% in current quarter.

Net profit tumbled: The company has reported 39% y/y fall in its Net profit to `20.4cr in current quarter ? one of the worst Net profit since Dec’08. Net Profit margin stood at 15.3% against 21.7% in same quarter last year.

Valuation

At current market price of `164, stock is trading at a PE of 4x discounting trailing four quarters EPS, EV/EBIDTA of 5.4x and EV/tonne of $49 discounting FY’11E earnings and capacity respectively.

We are initiating coverage on the company with ‘HOLD’’ rating. We have arrived at a target price of `174 for the company by valuing it at EV/EBIDTA of 5x and PE multiple of 5x discounting FY’12E EBIDTA and EPS respectively.

At our target price, stock would be trading at a PE of 5x, EV/EBIDTA of 4.9x and EV/tonne of $76 discounting FY’12E EPS, EBIDTA and year end capacity respectively.