The Hindu Business Line : Mangalam Cement gains on valuation buying

TOUTED as a turnaround story, the stock of Mangalam Cement (MCL), the Rajasthan-based BK Birla group company, hit the 10-per cent upper circuit band on the bourses at close of trade.

Post the BIFR rehabilitation package, the company has been attracting sustained market interest. The counter has appreciated by almost 17 per cent from around Rs 43.50 levels as on August 4 to its current levels of Rs 51.

Additionally, cement sector stocks have of late been moving up on the back of growing perception that the demand-supply balance is likely to tilt on the demand side in the near future.

Given the scenario, the company is said to be poised to make the most of the upsurge in demand in its main market, the northern region, where demand growth is pegged at over 10 per cent per annum. This area is traditionally a demand-excess and supply shortage region. The main markets for MCL are Rajasthan, Delhi, Western UP and Gujarat. The company operates at a capacity of 130 per cent.

A Kotak Securities report says that on the basis of EV (enterprise value)/ton, the company is valued at $42, making it one of the cheapest turnaround stocks in the cement sector.

According to an analyst tracking the sector, MCL will be valued at $55 on an EV/ton basis, a discount of 31 per cent to the industry average of $80. "This valuation is very low when compared with the mergers and acquisitions which have taken place over the last few years at an average valuation of $80 per ton and leaves huge scope for an upside in the valuations of MCLs shares," reasoned an analyst tracking the company.

In a bid to save cost, particularly in the area of power and fuel, the company plans to set up a captive thermal power plant of 17.5 MW capacity at a cost of Rs 55 crore. The groundwork has reportedly begun and the plant is expected to become operational by April '06.

"Currently the market is valuing MCL's assets at a 48 per cent discount to the industry average EV/ton of $80. As the company takes control of its most important manufacturing cost, power, through captive generation, we believe that the discount in EV/ton valuations would narrow down considerably. Moreover, the boom in cement will also improve EV/ton valuations of the entire industry. Thus, on comparing the present EV/ton of MCL with the industry average, the stock appears to be undervalued," the Kotak report said.

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