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Madras Cements: The story continues… - Views on News from Equitymaster

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Madras Cements: The story continues…

Feb 1, 2007

Performance Summary
Madras Cements, a major player in South India, continued with its robust performance during 3QFY07. The topline of the company has surged by 61% YoY and the operating margins company have expanded by 1560 basis points (15.6%) on account of favourable pricing scenario and robust demand. Operating margin expansion coupled with reduced finance charges has enabled the company to register more than seven fold jump in bottomline during 3QFY07. The net margins of the company stood at 17% for 3QFY07. The performance of the company for the nine months period was as impressive with topline increasing by 61% YoY, while operating margins and net margins expanding by 1,690 basis points and 1,420 basis points respectively, again (excluding other income) on account of improved realisations and strong demand.

Financial performance snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 2,427 3,910 61.1% 7,086 11,391 60.8%
Expenditure 2,010 2,631 30.9% 5,652 7,166 26.8%
Operating profit (EBITDA) 416 1,279 207.4% 1,434 4,225 194.6%
EBITDA margin 17.1% 32.7%   20.2% 37.1%  
Other income 13 16 18.8% 33 62 87.0%
Interest 112 85 -24.6% 253 169 -33.3%
Depreciation 173 180 3.7% 504 537 6.5%
Profit before tax/(loss) 144 1,031 615.6% 710 3,582 404.2%
Tax 48 349 626.2% 246 1,211 392.7%
Profit after tax/(loss) 96 681 610.3% 465 2,370 410.2%
Net margin 4.0% 17.4% - 6.6% 20.8% -
No of shares (m) 12 12   12 12  
Diluted EPS (Rs)         225  
P/E (times)         15.1  

What is the company's business?
Madras Cements has a total capacity of 6 MT (million tonnes) and caters exclusively to the southern markets, with Kerala and Tamil Nadu being its principal markets. It accounts for 4% of the total cement capacity in the country. The company has 4 manufacturing facilities. The larger units are in Tamil Nadu (TN) and Andhra Pradesh (AP) while the mini cement plant is in Karnataka. It also has two ready mix concrete (RMC) plants near Chennai. It was the first company in south India to convert all its capacity to the dry process. While the company's management has constantly created value for its shareholders, it has not looked beyond the southern markets to diversify geographically, which is a useful strategy for a commodity business like cement.

What has driven performance in 3QFY07?
Price windfall continues: During Apr to Dec 2006, the production and consumption of cement has increased by almost 10%YoY and 11%YoY in the southern region and the capacity utilization of the industry during the same period was around 91%. Madras Cements being a key player in the southern states of India has benefited from the same. Since the company does not provide its volume sales numbers, it would be difficult for us to comment on the same. Considering the strong topline growth and consumption growth during the quarter, volume sales could be in line with the industry. Thus the company’s topline growth can be attributed to strong realisations along with increased volumes.

Cost break-up (% of net sales) 3QFY06 3QFY07
Raw material consumed 16.1% 15.7%
Staff costs 5.2% 3.1%
Power & Fuel 24.6% 20.8%
Transportation & handling 18.0% 14.1%
Other expenditure 19.0% 13.6%
Total expenses 82.9% 67.2%

Margins leapfrog: Operating profits have more than tripled on the back of volume growth and improved prices in the region. The operating profits witnessed growth of almost 200% YoY, driving the EBITDA margins to 33% as buoyancy in the sector continued. Though the company reported stellar operating performance, costs concern continue on account of rising freight costs and transportation costs.

The extraordinary growth in operating profits coupled with reduced interest expenditure continued to take bottomline growth into even higher orbit. Increased cash flow from operations on a continued basis has resulted in lower interest charges during the quarter. The finance costs have decline by 25%YoY and 33% YoY during the quarter and 9mFY07 period respectively.

What to expect?
At Rs 3,392, the stock is trading at a price to earnings multiple of 15.1 times its trailing twelve month earnings. The company is setting up a cement plant in Tamil Nadu with a capacity of 2 MTPA at an estimated project cost of Rs 6.1 bn (just over Rs 3.0 bn per MT). It is also setting up additional clinkering facility in the state by installing a 4,000 TPD kiln to increase its production capacity by 2 MTPA at an estimated investment of Rs 4.4 bn. Though the move is considered positive for the company from a long-term point of view, over the medium term, risks of investing in the company outweigh the rewards on account of current stretched valuations.

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