On the way up
The company runs one of the most efficient operations in the country (LTM operating costs at Rs 2,900/t vs Rs 3,400-3,800 for peers). From its current base in Devapur (Telangana, 3 mtpa) and Jalgaon (Maharashtra, 2 mtpa), the company is expanding by adding 3 mtpa cement capacity at Gulbarga (Karnataka). At a total project cost of ~Rs 17bn and a guided commissioning by 1QFY16 (within 24 months from ordering), the upcoming plant is expected to set a new benchmark in project execution.
The next key challenge in front of the company is to replicate its best-in-class current operations at the new plant. Two solid advantages: Low landed cost of coal (due to proximity to the Singareni Collieries) and fly ash (from Ramagundam TPP) are not replicable. However, savings may accrue due to newer, more efficient equipment (new kiln, VRMs instead of ball mill-roller press combination). Further, the catchment area of new plant would include higher priced markets of Karnataka. As a result, the new plant may be able to generate similar EBITDA/t as the existing operations.
After its recent expansion (1.25 mTPA grinding and 0.5 mTPA clinker added in early FY14) at Morak (Rajasthan), the installed cement capacity stands at 3.25 mTPA. The expanded capacity lends Mangalam Cement increased efficiency in power and fuel consumption, improved PPC proportion and a 7 year VAT exemption for sale in Rajasthan. It has also tied up ~1,500 TPD (~0.5 mTPA) of grinding capacity on contract in NCR region. These contracts will allow the company to flexibly target the ultra-competitive NCR markets. Mangalam Cement has prudently expanded its capacity, despite testing market situations in FY13-14. Its balance sheet (FY14 end gross debt: Rs 3.6bn, net Debt: Rs 3.1bn, net D/E: 0.6) remains comfortable despite expanding ~1.6x in ~2 years. With first repayment on term loans starting only in June 2015, Mangalam is well set to reap the benefits of recent expansion. The company sits on >50 years of limestone reserves in its current location and is looking at further addition to clinkering capacity at Morak, coupled with split grinding in western UP. Its valuation at ~US$40/t and 4-5x 1 yr fwd EV/EBITDA (based on our rough cut estimates) is at a substantial discount to peers, both regional and pan-India.
The cement prices across India have risen recently, which can boost the OPM of pan-India players like UltraTech. UltraTech being an industry leader with a strong balance sheet is placed comfortably to grow inorganically by acquiring assets at reasonable valuations and maintaining its dominant position. The company is slated to increase its current capacity to 70 MMT by 2016 from 55 MMT currently. The company has pan-India presence and a strong balance sheet. The current valuation of cement companies is on the cusp of a re-rating considering the past cement cycles. UltraTech trades at a 39 per cent discount to its peak cyclical valuation.
Shree Cement has commissioned a grinding unit of two mtpa capacity at Aurangabad in Bihar on June 30, 2014. The company had 13.5 mtpa cement-making capacity before the commissioning of the unit. It has embarked on expansions to take its total capacity to 25 mtpa by 2015 aimed at consolidating position further in the North India market and gain a foothold On the East. The company´s trailing 12-month (TTM) EPS was at Rs 228.07 per share as per the quarter ended March 2014. The stock´s price-to-earnings (P/E) ratio was 31.71. The latest book value of the company is Rs 1103.32 per share. At current value, the price-to-book value of Shree Cement is 6.56.