Mangalam Cement - Undemanding valuations, good tactical bet to play cement upcycle

Mangalam Cement is a 4.5 million ton capacity cement player, predominantly operating in North & Central (considered to be the better regions for industry - utilizations are higher & players are more disciplined).It derives 80% of its revenue from 2 states (UP & Rajasthan), selling cement under brand name Uttam Birla.

Mangalam is a part of BK Birla group companies, that was given to one of his grand daughter (Vidula Birla Jalan). While there is not much growth aspiration showcased by management, but they have been doing bottlenecking exercises and efficiency improvement investments (like WHRS, etc.) to improve EBIDTA/ton.

They operate at healthy utilization levels of ~85%, my expectations are they can do 4 mn ton sales in FY23. Assuming demand to be strong in H2FY23/FY24 (pre-election years), coupled with company getting coal linkage (pending for 2 years) and reduction in the petcoke prices gradually - should help company deliver Rs 900-1000 EBIDTA per ton (they are at Rs 770 in 1QFY23, Rs 650 for FY22).

At that scale, expect overall company to deliver Rs 350 crore EBIDTA. Its currently trading at Rs 1000cr MCAP (Rs 370 share price), with net debt of Rs 300 crore. It implies EV/EBIDTA of 3.7x and EV/ton of 36$ (one of the cheapest players - even the replacement cost today is 100-110$ for a greenfield expansion).

While near term triggers are improvement in overall EBIDTA/ton (I dont expect much new capex, so scope for debt reduction also), expect upside of 50% (assuming 5x EV/EBIDTA, even at similar net debt levels).

Major upside in this stock can be if sometime Ultratech decides to acquire Mangalam Cement. Given its a BK Birla group company, don’t expect promoters will ever sell it to Adani. Also, given that at their size it will be difficult to grow the business, neither do I see any strong promoter intent to grow it. But if they decide to sell it, my sense is Ultratech will be willing to acquire given the synergies (branding, better raw material limestone quality, etc.) can help it improve EBIDTA /ton profile. Assuming they buy it at 20% discount to the replacement cost (at around 70-80$ per ton), stock can offer 100%+ upside. Having said that, given this is the only major business of promoters, I am not sure of probability or timing of such event.

I thing stock has limited downside, and offers a good tactical opportunity if someone expects cement to be on upcycle over next 2 years.

Disclosure - Invested.