Mysore Cements - Multibagger (by Deven Choksey, KR Choksey)

At the CMP, Mysore Cements is cheaply valued as compare to its peers on EV/EBIDTA and EV/Tonne basis.

In Q2CY2007, Mysore Cements has shown strong growth in sales and net profit by 27.3% and 565% respectively driven by higher growth in volumes and increase in the realization. Earlier, the company was running into losses due to higher interest amount on loans taken from the institutions like IDBI, IFCI etc. In July 2006, the world third largest cement manufacturer Heidelberg Cement AG acquired majority stake in the company i.e. 42.09% for the consideration of Rs 359 crore i.e. the company was valued at EV/Tonne of US $ 117. Post acquisition, the company has repaid the loans amounting to Rs 306.3 crore and now it is debt free company.

Going forward, we expect company to register sales of 2.4 MT in CY2007E vs 1.61 MT in 9MCY2006 driven by higher capacity utilisation, increase in blending ratio and higher demand for the cement. Additionally, with the savings on the interest cost, margins of the company is also expected improve. At the CMP, it is cheaply valued as compare to its peers on EV/EBIDTA and EV/Tonne basis.

Key Developments:

Sales showed strong growth of 27.3% In Q2CY2007, gross sales of the company showed robust growth of 27.3% yoy to Rs 195.9 crores driven by increase in the cement volumes and realization. Cement volumes (including clinker) grew by 13.3% to 0.6 MT in this quarter. Gross realization improved by 12.4% to Rs 3233/tonne. For half year CY2007, gross sales grew by 2.8% yoy to Rs 202.1 crores.

Financial Performance:

Net profit grew by more than 5 times

Company reported net profit growth of 565% to Rs 27.6 crores in Q2CY2007 driven by higher volume growth, increase in gross realization and lower interest cost. And also there will be lower tax burden on the company since it will be paying only MAT. PAT margins improved significantly from mere 2.7% in the second quarter of CY2006 to 14.1% in this quarter. EPS of the company stood at Rs 1.7 in Q2CY2007 vs Rs 0.5 in Q2CY2006.

Valuations

With the change in the management (i.e foreign promoter being now on board) performance of the company has improved significantly on all parameteRs Also, it has hived off its non cement business i.e. sponge iron and steel melting business where it enjoyed lower margins. At the CMP of Rs 45.3, it is trading at EV/EBIDTA of 5.2x TTM June 2007 and EV/Tonne of US$ 76.3. The company is cheaply valued as compare to its peers. Total cost of setting 1MT green field cement plant is US$ 105, however, the company is trading currently at US$ 77.4
EV/Tonne even below the price at which it was acquired i.e US$ 117 EV/Tonne. With the strong management in place, improved financials, we value Mysore Cement at EV/Tonne of US$ 115.


Risks: The risks that could hinder the earnings growth of the company in time to come are as under:

- Any further increase in freight cost both in the domestic and international market along with higher input cost could hamper the margin growth going forward.

- Any delay in the planned infrastructure spent by government as well as by corporates could dent the topline growth.

Growth: The growth of Mysore Cements in the coming years is likely to be fueled by the following factors:

- The govt. is planning to raise the total infrastructure spending from current 4% of the GDP to 8% over the next 5 years, which will give boost to cement demand in the country.


As per SEBI requirements it is stated that,Kisan Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation.