October 13, 2010

A relook – mangalam cement

I analysed mangalam briefly here and here and recently started analyzing the company again as I was looking at some other cement stocks. This is what I found -

The good
The company has a 2MT plant and supplies to the northern markets of Rajasthan, MP, Haryana and parts of western UP.

The company was a BIFR case till 2002-2003, but has been able to turn around the performance. The company has been able to maintain an ROE in excess of 20%. The topline has grown at around 10% and the net profits have gone up by a factor of 7 in the span of the last 7 years.

The company has been able to bring power cost as % of sales (power is a big component in cement) from 35% to around 24% levels. In addition the company has captive power plants and windmills, so it is not be exposed to fluctuations in power costs and cutbacks in the supply. The company now has a net profit margin in the range of 15-18% which is comparable to the other companies in the industry.

The company has excess cash of around 90 Crs on the books and is now planning a 1.75 MT brownfield project at the cost of around 800 crs. The total capacity should be around 3.75 MT by 2012, when the plant goes into production. In addition to the plant, the company is also setting up a 17.5 Mw captive power plant which should go onstream by the end of the current year.

The bad
The industry – cement – is a very cyclical industry and a pure commodity play. I really doubt consumers would pay too much premium for a brand. Pricing in this industry is driven by local/ regional demand and supply situation.

The upside is that the demand is growing rapidly, but at the same time there is quite a bit of supply coming online too. As a result pricing is unlikely to get too firm, with occasional dips on the way.

The ugly
The company board recently announced a merger with Mangalam timber (see
here) in the ratio of 1:10. It may appear that the mangalam timber shareholder is getting hurt, but I would say they are not the only ones hurt by this transaction.

Unless you believe that the true value of mangalam cement is the current price, it is not difficult to see that the management is giving out quite some value to the Mangalam timber shareholders. The merger is in the ratio of 1:10 and if one assumes a fair value at around 400 rs per share (difficult to explain this valuation in single line, so just play along with me even if you don’t agree), the management is giving out 40 Crs in value for the sister firm.

One can debate whether the merger ratio is fair or not, but I find cannot understand the logic of the merger. Please don’t suggest that the management is building a construction company – that way a steel company should buy a car company and imply that they are integrating forward.

The management is allocating 40 Crs on behalf of the shareholders and should be doing so in the best possible opportunity which adds value. Is mangalam timber the best value??

Anyway, inspite of this merger the company will still not lose too much of its value though it definitely does not give confidence to a minority shareholder.

Conclusion
I still think the company is fairly undervalued and is selling at 40-50% below fair value. I do not have a position in the stock and will continue digging further before I make up my mind

As always, please do your own research before you make a decision.

22 comments:

rajsmusings said...

Hi Rohit,

Do you have any thoughts on the Binani cement buyback offer ? They recently did a buyback at 90/- and now want to delist by buying all the shares but have not given a buyback price yet.
Is there a way to estimate the price for the buyback ?

Regards
Raja

Ayush said...

Hi Rohit,

Have a look at Birla Corp in the cement sector.

Though I haven't done a detailed work but the nos and balance sheet are really strong.

Regards,
Ayush

Navjot Kashyap said...

I stay away from cement,sugar stocks for this very reason only - its cyclic nature, which I do not understand. So, no matter how much rosy the past or future it might be, I will still prefer other companies.

Vic said...

Hi Rohit,

I find it surprising that many other Commodity (cyclic nature) companies are still undervalued e.g. some steel/alloy.

I would assume these should benefit since there's a lot of real estate/infrastructure spending going on. Current Bull run is a different point all together, don't know if this was the case during previous bull run.

Thanks,

Vikas

Anonymous said...

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I SOMEHOW FEEL MORE ENTHUSIASTIC ABOUT UR DOUBTFUL STOCKS.
VERY INTERSTING

DRMADHUPV

rayhaan said...

hi rohit ,q1.birla corp sure luks gud,wot r ur views on it? Q2. I believe an ncav situation like teesta and a super grower like empire industries present interesting oppurtunities. Wot r ur thoughts? Q3. Is cash eps a useful guide 2 evaluating profits? Wot r its downside? Q4. PLEASE PLEASE PLEASE HAVE A LOOK AT PIONEER INDUSTRIES. I believe it might present an intresting arbitrage play dat u ,ninad n (hopefully) ayush can appreci8. wishing u happy n profitable investing, rayhaan

Rohit Chauhan said...

Hi raja
you have to do a valuation exercise to figure fair value. then try to think through what the management could offer ..compute the upside if successful and downside if the delisting fails to get your profit / loss scenario

rgds
rohit

Rohit Chauhan said...

hi ayush
birla corp is not a pure cement play if am mistaken ?

anyway will have a look

rgds
rohit

Rohit Chauhan said...

hi navjot
i agree ..but i am still trying to understand the company and the sector ...putting my money in is a different matter. for that i need much higher conviction

rgds
rohit

Rohit Chauhan said...

hi vic
commodity stocks during upcycle appear really cheap and coversely expensive when the cycle is negative. so paradoxically investing when the stock appears expensive based on recent earnings works in case of commodity stocks

also the growth expectation and decent results are common knowledge ..so the price reflects the expected growth to some extent and investing in commodity stocks may not be a great idea now

rgds
rohit

Rohit Chauhan said...

dr madhav
please dont make buy decisions based on the stocks i discuss. i myself dont have a position in mangalam ..i am still not convinced that it is undervalued

rgds
rohit

Rohit Chauhan said...

hi rayhaan

have not looked at the companies you mentioned ..will let you know when i get a chance to do so

what is arb opportunity in pioneer ?

rgds
rohit

rayhaan said...

hi rohit , pioneer distilleries has a cmp of rs 84 and an open offer has been made by united spirits @ rs101 per share for 20% of d co. They've already bought 54% of d co. From d promoters. The offer begins from november. Wud luv 2 know ur opinion.
P.s. Dude pls check out our stock picks sumtimes, not all of dem r dat bad, u know!....:(

Anonymous said...

Hi Rohit,

What's your view on Coal India IPO?

Seems attractive to me.

Rohit Chauhan said...

hi rayhaan
let me have a look at the open offer

my friend , my delay at looking at the stocks is mainly due to shortage of time at my end and does not reflect their quality ...in the end anyone opinion will not matter if you analysis is right ..the market will give its verdict

rgds
rohit

Rohit Chauhan said...

hi anon
havent looked at the coal india IPO ..i personally never invest in IPOs ..i think i have posted about it in the past.

my personal view is that when a seller is selling their goods and know more than the buyer..it is unlikely to cheap. in my case as i want to buy the stock at a discount..i doubt my chances of getting it cheap in an IPO is high

rgds
rohit

Anonymous said...

Ya.. agree with your views on IPO. But this is govt selling, so case may be different than those of greedy promoters.

Also, looks a bargain to me based on using Reserves valuation techniques that you described in your post of Sesa Goa.

Ankur Jain said...

Hi rohit,

In my view, the merger with Manglam Timber needs to be studied in detail. How much debt is coming from the timber company, what are the earnings , increase in promoters' holding through this merger. Overall how will the merged company look like ?

Regards

Rohit Chauhan said...

Hi anonymous
yes thats possible..i really havent looked at the IPO ..may be i should

rgds
rohit

Rohit Chauhan said...

Hi ankur
I had a quick look. mangalam cement is accquiring timber for an EV of 80 crs ..a bz which has generated a profit of around 3-4 crs at best ..so we are talking of a ROI of less than 10%. again how this company fits in with a cement company ..who knows and the management has made no effort to spell it out

this is in a backdrop of almost 700+ cr of investments lined up for the cement biz. when you have such huge plans for the core biz ..why blow money on other unrelated business

rgds
rohit

mk said...

Dear Rohit,

I am a regular visitor of your blog. I have been greatly impressed with your way of estimating the value of an enterprise. I lack such understanding , though I do my own research based on PE ratio , book value , debt to equity ratio and market news etc. Since I stay abroad , I want to make use of my next trip to India to meet you as a sincere learner for 1 or 2 days.
If you really consider my request as an earnest one , please mail me at murkrishan@gmail.com .
Thanking you in advance.
Regards
Murali

Rajat said...

Hi Rohit

I think it's time to have a relook at Mangalam Cements. Merger with Mangalam timber has been called off and market price is 137 with decent dividend yield of 4.3%.

R