At an Inflexion Point

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4

Recommendation BUY At an Inflexion Point Mangalam Cement (MCL) remains our preferred pick in the small-cap cement space, as the company enjoys better market mix (North- 51% and Central- 49%), is likely to grow more than the industry post new capacity addition and is available at an attractive EV/ton of US$44. MCL reported flat growth in volumes in FY14 vs. 3% growth for the industry owing to lower demand in northern region and shutdown of kiln capacity for 5 months in FY14 (to upgrade the existing clinker capacity by 0.5 MTPA). However, worst seems to be over for the company as both its additional clinker and cement capacity of 0.5MTPA & 1.25MTPA respectively were put under trial run in Q4FY14 and has already started commercial production from June 2014.

Investment Rationale: Capacity ramp up to drive 18% volume CAGR during FY14‐16E MCL's additional clinker capacity of 0.5MTPA and cement capacity of 1.25MTPA in Morak (Rajasthan) were put under trial run in the Q4FY14 and has already started commercial production from June 2014. Post these expansions, MCL's clinker and cement capacity stands at 2.3MTPA and 3.25MTPA respectively. Increased capacity would enable MCL to maintain its market share in Northern region and will lead to volume growth from FY15 onwards. We expect the company to report robust volume CAGR of 18.5% over FY14-FY16E owing to stabilization of new capacity and favorable demand supply scenario with stable government. Realization to improve with revival in demand Average pan-India cement prices reported moderate growth of 1.8% yoy in 2013-14, owing to a slowdown in demand. The confluence of high cost/leveraged capacity additions and subdued realizations/demand has resulted in unfavorable operational economics. However, We expect realizations to improve from here on owing to demand recovery under the stable Government. We expect realization for MCL to grow at CAGR of 6.6% for FY14-16E (impact of sales tax subsidy given in the realization). Profitability increase potential—efficiencies targeted Recently the company has upgraded its kiln capacity which will help in reducing power consumption by 8 units per ton of clinker and coal consumption by 1%. We expect EBITDA/ton to improve to Rs 626/ton in FY16 from 241/ton in FY14 on the back of higher realization and recent cost initiatives taken by the company. Valuation At the CMP of Rs 202, the stock is trading at 8.2x and 4.6x of its FY15E and FY16E EV/EBITDA, respectively. We value MCL’s business at 6x FY16E EV/EBITDA and arrived at a price target of Rs 289, implying an upside potential of 43% in 15-18 months. We initiate coverage on MCL with BUY rating.

CMP Rs. 202

Target Price Rs 289

Sector Cement

Stock Details

BSE Code 502157

NSE Code MANGLMCEM

Bloomberg Code MGC IN

Market Cap (Rs crs) 539.4

Free Float (%) 72.6

52- wk HI/Lo (Rs) 88/204

Avg. volume BSE (Quarterly) 24517

Face Value (Rs) 10

Dividend (FY 14) 30%

Shares o/s (Crs) 2.67

Relative Performance 1Mth 3Mth 1Yr

Mangalam 43.2 81.4 52.3

Sensex 10.2 16.9 24.9

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Shareholding Pattern 31

st Mar 14

Promoters Holding 27.4

Institutional (Incl. FII) 2.6

Corporate Bodies 29.6

Public & others 40.4

Suhani Patel (+91 22 3926 8174) Suhani.patel@nirmalbang.com

Sunil Jain, HOR (Retail) (+91 22 3926 8196) sunil.jain@nirmalbang.com

Year

Net Sales (Rs crs)

Growth (%)

EBITDA (Rs crs)

Margin (%)

Adj PAT (Rs crs)

Margin (%)

EPS (Rs) PE (x) EV/ton EV/EBITDA

FY13 698.7 12.3% 123.3 17.6% 77.4 11.1% 29.0 7.0 54.5 5.3

FY14 687.5 -1.6% 46.0 6.7% 29.6 4.3% 11.1 18.2 43.5 18.5

FY15E 862.7 25.5% 102.0 11.8% 30.6 3.5% 11.5 17.6 42.9 8.2

FY16E 1080.8 25.3% 167.5 15.5% 82.9 7.7% 31.1 6.5 39.6 4.6

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Company Snapshot Mangalam Cement Limited (MCL), promoted in 1978, is a part of BK Birla Group. The company is engaged in the manufacturing of cement and has a capacity of 3.25MTPA along with 48.65 MW of captive power plant. Its cement and power plants are located at Rajasthan and it sells three products in cement, OPC grade 43, OPC grade 53 and PPC under the brand name Birla Uttam Cement. Currently MCL sells 60% PPC and 40% OPC. The company sells 51% of the total output in the northern region and 49% in the central region. The major selling markets in both regions are Rajasthan, Delhi, Haryana, UP and MP. Exhibit 1: Cement volume break-up (%)

31%

12%36%

13%

8%

Rajasthan Delhi UP MP Haryana

Source: Company, Nirmal Bang Research Currently Rajasthan constitutes 31% of company’s cement volumes. It will increase to 50% on account of sales tax benefit scheme announced by state Govt on new capacity of 1.25 MTPA. As per the management calculation the company will receive sales tax subsidy for 7 years starting from FY15. MCL will receive subsidy of around Rs 20 cr in FY15 (assuming the new capacity will operate for nine months). Thereafter, from FY16-21 it will be around Rs 27cr/yearly. Consequently, we have given the impact of sales tax benefit in realization.

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Investment Rationale: Recent capacity addition to drive growth MCL's additional clinker capacity of 0.5MTPA and cement capacity of 1.25MTPA in Morak (Rajasthan) were put under trial run in the Q4FY14 and has already started commercial production from June 2014. Post these expansions, MCL's clinker and cement capacity stands at 2.3MTPA and 3.25MTPA respectively. Increased capacity would enable MCL to maintain its market share and will lead to volume growth from FY15 onwards. We expect the company to report robust volume CAGR of 18.5% over FY14-FY16E owing to stabilization of new capacity and favorable demand supply scenario post elections. Exhibit 2: Volume Growth trend

-5%-7.4%

8.8%

13.0%

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FY10 FY11 FY12 FY13 FY14 FY15 FY16

Volumes YoY (%)

Source: Company, Networth Research Strategically located in the sound markets Northern Region

Growth in demand is expected to be led by the housing and infrastructure segments. Rajasthan, Punjab, Haryana and Delhi are likely to remain the key cement-consuming centres. Likely commissioning of large DMIC projects by H2FY15E would lead to higher cement demand growth in North and West regions. While real estate development in the Delhi region is likely to be slow over the medium term, healthy execution is expected in areas around Chandigarh. Individual housing projects are expected to continue to drive demand in the region. Central Region

The central region is one of the lowest cement consuming regions in India (140kg/per capita vs. India’s 192kg/per capita). Demand is set to be primarily driven by infrastructure projects, especially in Madhya Pradesh. In Uttar Pradesh, demand is expected to gradually pick up over the next 5 years with the execution of announced projects. Commercial development is also expected to drive demand in the region with the development of office spaces and retail projects.

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Realization to improve with revival in demand Average pan-India cement prices reported moderate growth of 1.8% yoy in 2013-14, owing to a slowdown in demand. The confluence of high cost/leveraged capacity additions and subdued realizations/demand has resulted in unfavorable operational economics. However, We expect realizations to improve from here on owing to demand recovery under the stable Government. We expect realization for MCL to grow at CAGR of 6.6% for FY14-16E. Exhibit 3: Realization Growth trend

7.3%

-9.4%

11.3%

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-0.8%

8.2%

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Realisation (Rs /Ton) YoY (%)

Source: Company, Networth Research Profitability increase potential—efficiencies targeted Usage of pet coke in kiln operations of MGC has significantly reduced the consumption of high grade limestone from 16% to 8‐9% thereby resulting in significant cost savings. Raw material cost/tonne has seen a reduction of 18% YoY in FY12. Recently the company has upgraded its kiln capacity which will help in reducing power consumption by 8 units per ton of clinker and coal consumption by 1%. We expect EBITDA/ton to improve to Rs 626/ton in FY16 from 246/ton in FY14 on the back of higher realization and recent cost initiatives taken by the company. Exhibit 4: EBITDA trend

1,058

368

521

642

241

448

626

31.2%

12.0%

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6.7%

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EBITDA/Ton EBITDA margin

Source: Company, Networth Research

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Q4FY14 result review

MCL reported strong performance in 4QFY14. Revenue rose 18% YoY to Rs 213.7 cr. The company’s realisation rose by 8% YoY (12% QoQ) to Rs 3749/ton and volumes (incl. clinker) were up by 10% YoY (19% QoQ) to 0.57 million tones. EBITDA/ton has improved to Rs 452 from Rs 334 in Q4FY13 and from negative Rs 144 in Q3FY14 on account of higher realization. Cost pressures rose by 16% YoY, mainly from purchase of finished goods and power & fuel cost (up 29% yoy) due to higher levels of clinker production and change in fuel mix. Q4FY14 Result Update

Q4FY14 Q3FY14 Q-o-Q Q4FY13 Y-o-Y

Net Revenue 213.7 160.6 33% 181.0 18%

Operating Exp. 189.7 167.5 13% 163.6 16%

EBITDA 24.0 -6.9 446% 17.4 38%

EBITDA (%) 11.2% -4.3% 9.6% 160 bps

Depreciation 8.6 7.0 23% 6.7 29%

EBIT 15.4 -13.9 211% 10.8 43%

EBIT (%) 7.2% -8.7% 5.9% 126 bps

Interest 4.5 2.3 96% 2.3 97%

Other Income 7.2 1.8 306% 4.0 82%

Exceptional Items 0.0 0.0 0.0

PBT 18.0 -14.4 225% 12.4 45%

Tax Provision 10.3 -14.9 169% 3.6 188%

Tax Rate (%) 57.1% 103.3% 28.9%

Reported PAT 7.7 0.5 8.8 -12%

PAT (%) 3.6% 0.3% 333 bps 4.9% -125 bps

EPS 2.9 0.2 3.3 -12%

Investment concerns

Sharp drop in demand Our estimates factor in 18.5% CAGR volume growth in FY14-16E respectively. A sharp drop in demand is a risk to our volume estimates for MCL.

Increased pricing pressure The performance of cement sector depends upon pricing movement to a large extent. We have factored in a 6.6% CAGR in average realization through FY14-FY16E. Lower-than-expected increase will pose downside risk to our estimates. Input cost pressure Historically, cement companies have been able to pass on the rise in input costs to end consumers. However, in a scenario of oversupply, the companies may not be in the position to pass on the increase in input costs. Hence, substantial increase in pet coke prices, domestic coal prices, and crude oil can pose downside risk to our estimates.

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Industry Overview Worst behind for the sector, Recovery to be gradual Demand growth likely to be driven in second half Demand has been consistently weak over the last 12-18 months. The key reason for demand weakness has been a slowdown in both government and private expenditure and a slow pace of infrastructure growth. This slowdown moderated cement demand growth to 4-5% during FY11-14E vs. 8-9% growth witnessed during FY05-10 period. We expect Cement demand should be boosted by the new government’s stated focus on infrastructure and low-cost housing in the coming years. Exhibit 5: Incremental capacity addition is slowing down

FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Insta l led capacity 219 251 299 335 344 360 379 393

(%) Change 11% 15% 19% 12% 3% 5% 5% 4%Additions 21 32 48 36 9 15.6 19.6 13.8

Effective Capacity 205 232 268 299 331 350 360 375

Cement Production 181.0 200.0 212.0 225.0 235.0 242.0 255.0 272.0

(%) Change 8% 10% 6% 6% 4% 3.0% 5.4% 6.7%

Capacity Uti l i sation 88% 86% 79% 75% 71% 69.1% 70.8% 72.5%

Domestic Dispatches 177.8 198.0 209.0 221.0 232.0 239.0 252.0 269.0

Exports 3.2 2.2 3 3 3 3 3 3

Total Dispatches 181.0 200.0 212.0 225.0 235.0 242.0 255.0 272.0

Despatch growth (%) 7.7% 10.5% 6.0% 6.1% 4.4% 3.0% 5.4% 6.7%

Incremental Supply 26 27 36 31 32 19 10 15

Incremental demand 13 19 12 13 10 7 13 17 Source: Nirmal Bang Research Exhibit 6: Region-wise capacity addition over next years

Region- Wise addition FY15E FY16E

NorthAmbuja cement 0.8

Shree Raj 2

JK cement 3

Ultratech rajasthan 2.9

JK lakshmi cement udaipur 1.4

SouthDalmia 2.5

Madras 1

EastShree Cements - Chhattisgarh 2

Shree cement Bihar 2

OCL 1.4

Ultratech Chhattisgarh 3.2

JK Lakshmi Cement - Durg 2.7

ACC CH 3.6

Ambuja WB 0.8

Shree Cements - Chhattisgarh 2

WestReliance Cement 2.1

CentralTotal 19.6 13.8

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Demand pickup along with consolidation will lead to higher profitability Average pan-India cement prices reported moderate growth of 1.8% yoy in 2013-14, owing to a slowdown in demand. However, the confluence of high cost/leveraged capacity additions and subdued realizations/demand has resulted in unfavorable operational economics. We expect realizations to improve from here on as the leveraged tail of the Indian cement industry will find it difficult to sustain operations under the status quo. In addition, moderation in capacity additions/ revival in demand on the back of strong government and favorable base (following a prolonged slump) and industry consolidation as large producers with strong balance sheets absorb weak and leveraged producers will help in realization growth. Exhibit 7: Price Trend

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Source: Nirmal Bang Research

Cost pressures to ease The Indian cement industry has witnessed significant cost pressures in two key cost components: energy and freight. The average cost structure of Indian cement companies is: 1) 25-30% power and fuel costs; 2) 25-30% freight expenses which also track the diesel price increase for road transport and railway fare hikes; 3) 15-20% raw material costs for fly ash, gypsum, etc, and 4) 20-25% employee + other expenses which are largely fixed. Costs increased in FY14 across the board, driven by lower ‘linkage’ coal, higher global coal prices, diesel prices, higher fixed costs and INR depreciation. We expect cost pressure to ease in FY15/FY16 led by 1) 11% YTD dip in international coal prices and rupee appreciation 2) rising usage of pet coke 3) a likely reduction in freight cost as rising demand brings down the distance. Exhibit 8: International coal prices easing off

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International Coal ($) INR

Source: Bloomberg, Nirmal Bang Research

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Valuation

Under a strong government, the cement sector will benefit from a potentially faster recovery in the investment cycle, especially in infrastructure. While sector profitability could remain under pressure over the next 1-2 quarters, the long-pending infrastructure projects could be fast-tracked by the new government, resulting in a demand recovery and higher profitability in the next two years.

On the back of 1.25 MT grinding expansion at Rajasthan, we expect cement volumes to grow at a CAGR of 18.5% during FY14-16E as the company is currently operating at a utilisation rate of over 90%. Realizations are expected to improve at a rate of 7% CAGR during the same period, driven by a pick-up in demand. This, along with the benefit of operating leverage would help in improving margins, going forward. At the CMP of Rs 202, the stock is trading at 8.2x and 4.6x of its FY15E and FY16E EV/EBITDA, respectively. We value MCL’s business at 6x FY16E EV/EBITDA (5-10% discount to mid-cap companies) and arrived at a price target of Rs 289, implying an upside potential of 43% in 15-18 months. Our target price implies a replacement cost of US$50per MT on its blended capacity. At EV/ton the valuations are 50-55% discount to the mid cap companies. We believe, given the size of capacity of MCL and low risks in its business profile, the target valuation multiple is justified. We have given the benefit of sales tax subsidy in net realization.

Exhibit 9: Peer comparison (FY16)

Companies Capacity (mn) Market Cap Net Debt Investments EV EV/ton ($) EBIDTA EV/EBIDTA

JK Cement 10.5 2,516.8 2,308.0 46.5 4,778.3 75.8 719.2 6.6

Jk Lakshmi 10.6 2,338.1 1,141.0 338.0 3,141.1 49.4 581.9 5.4

Orient Cement 8.0 1,679.9 1,271.8 0.0 2,951.7 61.5 415.0 7.1

Mangalam 3.3 538.3 268.3 35.6 771.0 39.5 167.5 4.6 Source: Bloomberg, Nirmal Bang Research Exhibit 10: Valuation

Valuation

EBITDA 167.5

Target EV/EBITDA 6

EV 1004.8

Less Debt 321.7

Add cash 53.4

Investments 35.6

Market Cap 772.1

No of shares 2.67

Target Price 289.2 Source: Nirmal Bang Research

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Exhibit 11: One year forward EV/EBITDA band

0.00

2.00

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8.00

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EV/EBIDTA 3yr avg 5yr avg

Source: Bloomberg; Nirmal Bang Research

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Financials

Profitability (Rs. Cr) FY13 FY14 FY15E FY16E Financial Health (Rs. Cr) FY13 FY14 FY15E FY16E

Y/E - March Y / E - March

Revenues - Net 698.7 687.5 862.7 1080.8 Share Capital 26.7 26.7 26.7 26.7

% change 12.3 -1.6 25.5 25.3 Reserves & Surplus 465.7 480.3 501.2 557.9

EBITDA 123.3 46.0 102.0 167.5 Net Worth 492.41 507.00 527.93 584.58

Depreciation 25.1 27.7 42.0 45.2 Total Loans 243.1 391.7 371.7 321.7

Other Income 14.4 14.4 15.6 16.8 Deferred Tax 58.4 61.0 61.0 61.0

EBIT 112.6 32.6 75.7 139.0 Total Liabilities 793.8 959.8 960.7 967.3

Exceptional Item 0.0 0.0 0.0 0.0 Net Fixed Assets 349.2 671.4 779.4 754.2

Interest 4.8 8.7 36.4 32.7 CWIP 214.1 98.6 0.0 0.0

PBT 107.8 23.9 39.3 106.2 Investments 35.6 35.6 35.6 35.6

Tax 30.4 -5.7 8.6 23.4 Inventories 136.6 115.9 139.4 166.7

PAT 77.4 29.6 30.6 82.9 Sundry Debtors 30.2 22.7 25.9 32.4

Shares o/s ( No.in Cr.) 2.7 2.7 2.7 2.7 Cash 92.3 46.4 32.8 47.8

EPS 29.0 11.1 11.5 31.1 Loans & Advances 82.6 114.3 129.4 162.1

Other assets 28.2 37.4 37.4 37.4

Current Assets 369.9 336.7 365.0 446.5

Current liab & Provisions 175.0 182.6 219.3 268.8

Quarterly (Rs. Cr) Jun-13 Sep-13 Dec-13 Mar-14 Net Total Assets 194.9 154.1 145.7 177.6

Revenue 168.3 144.9 160.6 213.7 Total Assets 793.8 959.8 960.7 967.4

EBITDA 24.7 4.1 -6.9 24.0 Cash Flow (Rs. Cr) FY13 FY14 FY15E FY16E

Interest 0.9 0.9 2.3 4.5 Operating

Dep 6.1 6.1 7.0 8.6 PBT 107.8 23.9 39.3 106.2

Other Inc. 1.6 3.8 1.8 7.2 add Depreciation 25.1 27.7 42.0 45.2

Exceptional 0.0 0.0 0.0 0.0 Interest 4.8 8.7 36.4 32.7

PBT 19.3 0.9 -14.4 18.0 less Income -14.4 -14.4 -15.6 -16.8

Tax 0.5 -1.7 -14.9 10.3 Tax -30.4 5.7 -8.6 -23.4

PAT 18.8 2.6 0.5 7.7 Change in WC -0.6 -5.2 -5.1 -17.0

EPS (Rs.) 7.1 1.0 0.2 2.9 CF from Operation 92.2 46.4 88.3 127.1

Investment

Capex -216.4 -234.5 -51.4 -20.0

Operational Ratio FY13 FY14 FY15E FY16E Other Investment -34.5 0.0 0.0 0.0

EBITDA margin (%) 17.6% 6.7% 11.8% 15.5% Income 14.4 14.4 15.6 16.8

PAT margin (%) 11.1% 4.3% 3.5% 7.7% Total Investment -236.4 -220.1 -35.7 -3.2

Price Earnings (x) 7.0 18.2 17.6 6.5 Financing

Book Value (Rs.) 184.4 189.9 197.7 218.9 Change in debt 215.6 151.4 -20.0 -50.0

ROE (%) 15.7% 5.8% 5.8% 14.2% Change in equity 0.0 0.0 0.0 0.0

ROCE (%) 15.3% 3.6% 8.4% 15.3% less Interest -4.8 -8.7 -36.4 -32.7

Debt Equity Ratio (x) 0.5 0.8 0.7 0.6 less dividend -18.7 -9.4 -9.7 -26.2

Price / Book Value (x) 1.1 1.1 1.0 0.9 Others 1.5 0.0 0.0 0.0

EV / EBIDTA (x) 5.3 18.5 8.3 4.6 Total Financing 193.5 133.3 -66.1 -108.9

EV/ton 54.5 43.5 43.2 39.9 Net Chg. in Cash 49.3 -40.4 -13.5 14.9

Cash at beginning 43.6 92.3 46.4 32.8

Cash at end 92.3 46.4 32.8 47.8

Source: Company, Nirmal Bang Research

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NOTES

Disclaimer:

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and

estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This

document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for

general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated

herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This

document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees

may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or

perform investment banking or other services for any company mentioned in this document.

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)

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Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001

Fax. : 022 3926 8010