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Soft Performance on Low Volume: Maintain HOLD
Mangalam Cement (MGC) continued to deliver a dismal performance in 4QFY19 as well mainly led by lower-than-expected sales volume and higher freight cost. Sales volume declined by 2% YoY and 6% QoQ to 0.77mnT, while average realisation improved by ~1.4% QoQ to Rs4,153/ tonne. While EBITDA broadly came in-line at Rs197mn (+69% YoY and +61% QoQ), EBITDA/tonne remained abysmally low at Rs257 notwithstanding improvement from Rs148 and Rs150 in 4QFY18 and 3QFY19, respectively. Operating cost/tonne marginally softened QoQ at Rs3,896 (-1.2% QoQ) due to ~6% QoQ reduction in input cost/tonne (RM + Power & Fuel). However, higher lead distance led to higher freight cost/tonne. We further note that there has been an auditor qualification for Rs151mn value of coal, which was sent for processing, is lying with the vendor for a long time, which it could not supply to MGC due to financial difficulty. We believe that commissioning of 11MW WHRS in Oct’19 and recent realisation recovery are likely to aid MGC’s performance in the subsequent quarters. We upgrade our EBITDA estimate by 5%/6% for FY20E/FY21E, respectively to factor in higher-than-expected realisation recovery. However, despite attractive valuations we do not envisage any meaningful upside from the current levels as the stock has already witnessed a sharp appreciation in last three months. Hence, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs255 (from Rs210 earlier).
Dismal Sales Volume
Despite healthy demand environment in its key markets, MGC, unlike its peers, reported a volume degrowth of 2% YoY and 6% QoQ to 0.77mnT. Poor availability of flyash at Aligarh SGU and clinker shortage resulted in 0.15mnT and 0.3mnT volume loss in 4QFY19 and FY19, respectively. As per the Management, volume growth is likely to be better in subsequent quarters. We estimate MGC to register 7.4% volume CAGR through FY19-FY21E.
Higher Freight Cost and Soft Volume Hurt Operating Performance
Despite an improvement in realisation (+7% YoY and +1.2% QoQ), higher-than-expected freight and other expenditures impacted MGC’s quarterly performance. EBITDA/tonne remained lacklustre at Rs257 despite improvement from Rs148 and Rs150 in 4QFY18 and 3QFY19, respectively. We expect its operating performance to improve, going forward on the back of savings from WHRS and recent realisation recovery.
Outlook & Valuation
Continued cost pressure and soft volume dragged MGC’s quarterly performance. While we believe that commissioning of 11MW WHRS and sustainability of realisation recovery is likely to aid MGC to witness a remarkable improvement in its unitary EBITDA in subsequent quarters. However, considering its below par operating performance even after realisation recovery, stock is unlikely to be re-rated. Hence, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs255 (6x of EBITDA FY21E).
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