Mysore Cements - what I think about..

Recently read through the Annual Report of Mysore Cements. These are my initial impressions from report.
Mysore Cements is a SK Birla promoted company with a cement production capacity of 2.1 million tonnes across 3 production facilities in Karnataka, UP and MP. The SK Birla group has recently off-loaded its entire stake of 54.38% to Hiedelberg Cement Group of Germany. Now, Mysore Cements is a subsidary of Hiedelberg Group. The company is expanding its capacity to 5.9 million tonnes per annum subject to approvals from regulatory authorities. The Board of the company has been re-cast with the nominees from Hiedelberg group taking over the Birla held board positions. The company is merging Indorama cement and Hiedelberg Cement India P Ltd with itself w.e.f 01 April 2008.
The company follows Jan-Dec accounting year and for the y.e 31 Dec 2007, the total production of Cement and Clinker stood at 2.201 Million tonnes companred to 1.610 million tonnes for the y.e. 31 Dec 2006, implying a production increase of 36%. The net realisation per tonne of cement during 2007 stood at Rs3271 compared to Rs2954, again showing an upward bias in price realisation.

Positives:
1. The company revenue and profits have been raising continuously over the last 4 quarters. Of course, the cement cycle is doing good being the primary reason, the company's association with Hiedelberg may be a positive in the long run. The net profit of the company has increased to Rs97.65 crores for the y.e 31-12-07 compared to the loss of 2.19 Rs34.31 crores in y.e. 31-12-06. For the quarter ended 31-03-08, the company has reported an EPS of Rs 2.59.
2. The company holds cash to the extent of Rs180.73 crores in the Balance sheet as at 31-12-07. This works to per share value of Rs11.43. The total market capitalisation of Mysore Cements at the current rate of Rs32 works out to Rs506 crores.
3. The company has generated cash of more than Rs.80 crores for the year ended 31.12.07.
4. The company holds 12 lakh shares of Cimmco Birla Ltd., in its books valued at Rs12 lakhs. The market price of Cimmco Birla is Rs25 per share and there is already a proposal of takeover by Titagarh Wagons. Since Cimmco Birla is under BIFR purview, the promoter company can not sell the stake now.
5. In addition to this, the company holds investments in listed entities which are valued clost to Rs2.50 crores. (As per the last balance sheet it was valued at Rs5.45 crores. Considering the erosion in value of securities over the last few months, I have reduced the market value of investments by more than 50% to Rs2.50 crores)
6. The company has accumulated losses of Rs269.83 crores in the books which will help the company to reduce the tax burden over the next couple of years.
7. The company is quoting at an attractive valuation of less than USD65 Economic Value per tonne compared to the industry average of USD105 per tonne.

8. The company has an expanding operating margin over the last 3-4 quarters.

Negatives:
1. Cement being a highly cyclical industry, the fortunes may swing wildly. The per tonne realisation may not be sustained, there can also be a drop in the demand for cement due to economy slowdown. The company may also face difficulty in managing rising input costs, in-adequate limestone mining facilities, coal availability and increasing railway freight charges.
2. The company being located in the hinterland, the exports may not be an viable option at all.
3. The accumulated losses to the extent of Rs269 crores will stop any dividend pay-out for the next couple of years atleast.
4. Increasing cement capacity across the industry leading to fall in price.

My take on this company:
The company looks interesting to me at this price of Rs32 considering its parentage. I am being very conservative in estimating the full year EPS to be around Rs7.50 (instead of Rs10 thats what you will get if you just annualise the first quarter ending 31 March'08). It is quoting at 4 PE but since it is a turn-around story and zero-debt company (very important in a rising interest rate scenario) it is destined to do better.

I would ideally look at a price of Rs45 over the next one year at the minimum for this scrip, which presents a possible upside of around 50% from the current price levels.