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Madras Cements: Profitability blues - Views on News from Equitymaster
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Madras Cements: Profitability blues
Jan 28, 2010

Performance summary
  • Sales decline marginally by 0.3% YoY during 3QFY10. The same could be attributed to softening of cement prices in southern region.
  • Higher cost of operation and poor show at the topline leads to 32% YoY fall in operating profits in 3QFY10.
  • Apart from fall in operating profits, higher interest and depreciation costs result in nearly 74% YoY decline in profit before taxes. Hence, despite lower tax outgo net profits decline by 74.5% YoY in 3QFY10.
  • For the nine month ended December 2009, net sales have grown by 17.7% YoY, while growth in net profits stands at 11.7% YoY.

Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 6,092 6,071 -0.3% 18,885 22,234 17.7%
Expenditure 4,511 4,996 10.8% 12,792 14,904 16.5%
Operating profit (EBITDA) 1,581 1,075 -32.0% 6,093 7,331 20.3%
EBITDA margin 26.0% 17.7%   32.3% 33.0%  
Other income 37 57 56.0% 106 140 32.2%
Interest 301 375 24.4% 801 1,125 40.5%
Depreciation 361 508 40.6% 986 1,433 45.4%
Profit before tax/(loss) 955 250 -73.8% 4,412 4,913 11.4%
Tax 328 90 -72.5% 1,510 1,670 10.6%
Profit after tax/(loss) 627 160 -74.5% 2,903 3,243 11.7%
Net margin 10.3% 2.6%   15.4% 14.6%  
No of shares (m)**       238.0 238.0  
Diluted EPS (Rs)*         16.7  
P/E (times)         6.7  

What has driven performance in 3QFY10?
  • Madras Cements net sales declined marginally by 0.3% YoY during the 3QFY10. The company does not publish volume numbers and hence it is difficult to comment on the same. Looking at the trend and the numbers reported by other southern players, one can conclude that its performance must have also been impacted by softening of cement prices The approximate average decline in cement per bag price is over 20%. While the ongoing infrastructure activity, rural housing and government stimulus has sustained the demand for the commodity, upcoming capacities must have lead to competitive pricing scenario.

  • The company has achieved its capacity expansion target by the end of FY09. Thus, the newly built capacity must have come on stream to enable the company to cater to the sustained demand for the commodity. However, with increase in production levels, the company’s consumption of raw materials must have increased, especially of lime stone (higher royalty charges), etc. During the 3QFY10, the company was able to lower its power costs on account of its initiative to set up wind farm capacity to tackle the problem of rising fuel prices. However, higher other costs (raw material, staff and transportation costs) and lower cement prices led to 32% YoY fall in operating profits.

  • Profit before tax has reported a steep fall of 73.8% YoY. This is mainly on account of higher depreciation and interest costs. The company’s capital expenditure plans has led to increase in these corporate costs. Hence, despite lower tax outgo net profits declined by 74.5% YoY in 3QFY10.

What to expect?
The performance of southern players in the past few quarters was affected on account of elections, ongoing agitations, etc. Additionally most of the capacities have also come in during the calendar year, 2009. The impact of the same is visible in this quarter’s performance. The southern region had witnessed sharp drop in prices. However, the same have started firming up marginally December onwards.

The company is likely to end the year in line with our expectations. The downsides to our estimate would be further softening of cement prices or increase in cost of production. At the current price of Rs 111, the stock is trading at an EV/ton of little over Rs 4,000 as per our FY12 estimates, which makes it fairly valued.

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Feb 21, 2018 (Close)


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