Buy Mangalam Cement; target of Rs 425: Sushil Finance

Sushil Finance's report on Mangalam Cement

"We expect revenue CAGR of 21 % over FY14-17E on the back of 15.9% volume CAGR and 4.3% realization CAGR. We expect realization to improve by 4%/4%/5% over FY15/16/17. Higher capacity utilization coupled with lower cost inflation & operating leverage will help EBITDA/ Ton to improve from Rs 292/ Ton in FY14 to Rs 520/725/800/Ton in FY15/16/17 respectively. EBITDA margin is expected to improve from 8% in FY14 to 13.7%/18.4%/19.3% in FY15/ FY16/FY17.EBITDA is expected to grow more than fourfold to Rs 2392 Mn by FY17 from Rs 557 Mn in FY14. In FY12/13 the company had reported EBITDA /Ton of Rs 632/709."

"Mangalam was debt free till FY12, after which it raised debt for its 1.25 MnT capex plan & currently the net debt of the company stands at ~Rs.2,500 Mn. We expect the company to generate Rs. 1735 mn of free cash over the FY14-17 & this will help in either reduction in debt or go for further capex. The current debt: equity stands at 0.7x (FY14), which is further likely to improve to 0.5x by FY17, assuming no repayment of debt."

Outlook & Valuations:"At the CMP of Rs.300the stock is trading at 7.8x its F16E & 6.3XFY17E EPS, and 5.1x FY16 & 4.1x FY17 EV/EBITDA. At EV/ Ton of $ 51(FY17E), we believe the stock has room for re-rating and recommend BUY on the stock with a target price of Rs 425, implying 40% upside. At the target price the stock would trade at $ 65/ Ton. The stock is trading at a 50% discount to mid sized cement players and more than 70% discount to large players in the listed space. We believe the strong return ratios and unleveraged balance sheet should result in re-rating in the stock", says Sushil Finance research report.

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