MYSORE CEMENT - A SURE SHOT WINNER

Mysore Cement-A Call At Rs 15.75
BSE 500292; CMP Rs 15.75

The way I would play Mysore Cement is to consider the current market price of the stock as a Call option with a one year expiry. And within the next 12 months I would expect the stock to double-a return of 100 per cent. Is it possible? Yes, it is.

Mysore Cement is now owned to the extent of roughly 60 per cent by the Rs 55,000 crore German major Heidelberg Cement. Post merger of IndoRama Cement and Heidelberg Cement Pvt Limited with Mysore Cement, the total cement manufacturing capacity with the company has risen to 3 mn tonnes. The corporate with units in Mysore, Damoh, Jhansi and Pune is now in a position to serve the south and west regions of India.

Consistent fund infusion from Heidelberg has turned Mysore Cement into a debt free corporate, with CY08 EPS expected to be slightly above Rs 5 per share. This makes the stock the cheapest play in the cement sector at a PE of 3 or more appropriately the corporate will earn enough to pay-off its Equity in 3 years.

Though signs of slow down are apparent, the recent moves by the GOI to reduce Cenvat on Cement, and the fall in Crude will reduce manufacturing costs through a majorly lower power and transport bill while cheaper cement will encourage more construction activity.

On a replacement cost basis too, Mysore Cement is under-valued. The 3 mn tpa capacity will cost Rs 750 crore should a greenfield unit be set up today, against the enterprise value of Rs 352 crore that Mysore Cement possesses today. If things proceed as per plan, the stock should double by December 2009.

What is important is that Heidelberg sees a great future for Cement in India. It had bought over the Birla and public stake at Rs 58 per share a year ago, and through fresh infusion of equity at Rs 54 per share paid off all institutional debt making Mysore Cement a zero debt company.

The plans as of now include doubling the cement capacity to 6 mn tpa by 2011-2012.

The Opportunity

The Indian economy is witnessing its best ever growth phase with the GDP expected to continue to grow between 8.5%-9%. It is well understood by the policy makers that the biggest obstacle to growth of over 9% or more is India’s infrastructure – especially the state of roads, ports and power. India spends 4% of its GDP on infrastructure investment compared with China’s 9%.

The Government of India has plans to raise the total infrastructure spending to 8% of GDP over the current five year plan. With the thrust on the infrastructure development, boom in housing sector and accelerated road and highways development, demand of cement is expected to be firm. In order to tap the future potential of the cement sector in India, the Company is contemplating the expansion of capacity from the existing 3.0 million tonnes per annum to 5.9 million tonnes per annum.

Outlook

Cement manufacturers have announced capacity increases, but gestation period of the projects has gone up due to capacity constraints of plant and equipment suppliers. This implies that new capacities are likely to take longer time to come on line and that the capacity utilization levels would be comfortably placed atleast for the next few years.

The demand for cement over the next five years will be robust enough to absorb 40 million tonnes of Greenfield capacity, according to CRIS INFAC’s (a subsidiary of CRISIL) news report on the long term outlook for the industry.

This capacity addition will require an investment of nearly Rs. 13,200 crores.

Industry profile

Industry structure and developments The Indian cement industry has a capacity of around 173.08 million tonnes per annum at the end of December 2007 as reported by the Cement Manufacturers Association (CMA). Against this, the cement production was 163.90 million tonnes during the period January to December 2007 exhibiting a growth of 7.12 %.

The cement despatches during this period were 159.20 million tonnes, showing a growth of 9 %. Western Region recorded a growth of 14% in cement consumption during the period January to December’07. Southern and Northern Regions achieved a growth of over 10%. Central and Eastern regions exhibited a growth of 4% and 3% respectively. Cement export during this period declined by 34% from 6.4 million tonnes in 2006 to 4.2 million tonnes in 2007, due to robust domestic demand.



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