A brighter future?

SPECIAL REPORT

Heidelberg stake and cement demand could boost Mysore Cement's fortunes.

Despite the boom in infrastructure, S K Birla group's Mysore Cement has been making losses for some time now.

The company had been referred to BIFR, as its net worth was wiped out. It posted a loss of Rs 90 crore in FY06.

But one can expect conditions to improve if global cement major Heidelberg Cement acquires a majority stake in the company, as reported in the media. Investors could benefit from an open offer that may follow the acquisition. But that's not just it.

In a recent statement, the company said that it has been attempting to address its problems by raising additional capital resources as well as restructuring its debt. One of the stipulations of this restructuring provides for hiving off the Ammsandra unit in Karnataka.

The company has been exploring various options and has been in discussions with financial intermediaries and other entities, according to the statement.

Although the company management has termed it premature to comment on the stake sale, market watchers say that Heidelberg has decided to buy a 30 per cent stake.

Meanwhile, the outlook for the cement sector is looking up anyway. Rajan Kumar, analyst with Networth Stock Broking says, "The future of Mysore Cement depends upon how Heidelberg turns it around."

Other analysts feel that the company which has plants in UP, MP and Karnataka has to invest in improving its efficiency. While UP is considered to be a market with good volumes, demand is improving in Karnataka.

For instance, according to Cement Manufacturers' Association (CMA) data, cement consumption in the central region during May 2006 has increased by about seven per cent y-o-y, while that in the southern region has increased by 16 per cent.

Overall, the demand for cement is expected to remain upbeat, on the back of the ongoing investments in roads, ports, airports and housing.

Financials
Mysore Cement posted a 7.1 per cent growth in FY06 net sales to Rs 424.21 crore, while there was an operating loss of Rs 38.27 crore as compared to an operating profit of Rs 29.64 crore in FY05. 
 

FINANCIALS
(Rs crore)	FY06	FY05	Change %
Net sales	424.21	396.12	7.09
Operating profit	-38.27	29.64	-
OPM (%)	-	7.48	-
Net profit	-89.91	-24.79	-

Last year, the company had a debt of over Rs 300 crore on its balance sheet. Kumar says that the low valuation of the company can be attributed to these factors.

According to analysts, Heidelberg is said to have offered to pay Rs 50-55 per share for Mysore Cement, even as another company of similar size could have commanded Rs 70-80 per share.

Some find this cheap, while others argue that the valuation comes to about $83 per tonne while a greenfield plant would cost $75 per tonne and peers like Chettinad Cement would command premium valuation of $100 per tonne or so, owing to better efficiency.

In May 2006. Mysore Cement had a production of 1.88 lakh tonnes and despatches of 1.78 lakh tonnes.

Valuations
While Mysore Cement would have a negative P/E, Chettinad Cement and Prism Cement have multiples of 19.72x and 21.02x respectively.

The stock of Mysore Cement has risen by over 63 per cent over the past six months, while that of Chettinad and Prism have appreciated by 81 per cent and 43 per cent respectively.

Analysts say Mysore Cement may be worth holding given the uptake in the cement sector and possibilities of a turnaround after the entry of Heidelberg.