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Madras Cements: Still riding the boom… - Views on News from Equitymaster
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Madras Cements: Still riding the boom…
Feb 4, 2008

Performance summary
  • Topline grows by 31% YoY, while operating profits grow by 49% YoY.
  • The robust growth was backed by favourable pricing scenario prevailing within the industry.

  • Costs grew at a slower pace compared to topline growth.

  • Net profit too exceeded topline growth and has witnessed 62% YoY.

  • Net margins expanded in line with EBITDA margins, led by healthy operating profits, lower interest outgo and higher other income.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 3,910 5,124 31.0% 11,391 14,819 30.1%
Expenditure 2,631 3,218 22.3% 7,166 8,940 24.8%
Operating profit (EBITDA) 1,279 1,906 49.1% 4,225 5,879 39.1%
EBITDA margin 32.7% 37.2%   37.1% 39.7%  
Other income 16 20 27.2% 62 68 9.9%
Interest 85 81 -4.8% 169 242 43.3%
Depreciation 180 225 25.1% 537 721 34.2%
Profit before tax/(loss) 1,031 1,621 57.3% 3,582 4,985 39.2%
Tax 349 515 47.4% 1,211 1,664 37.4%
Profit after tax/(loss) 681 1,107 62.4% 2,370 3,321 40.1%
Net margin 17.4% 21.6%   20.8% 22.4%  
No of shares (m) 12 12   12 12  
Diluted EPS (Rs)*         334  
P/E (times)         11.7  
* trailing twelve month earnings

What has driven performance in 3QFY08?
  • Prices continued to remain firm on account of sustained demand for the commodity. This has led to topline growth of 31% YoY and 30% YoY during 3QFY08 and 9mFY08. Madras Cements being a key player in the southern states of India must have 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.

    Cost break-up
    (% of net sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Raw material consumed 15.7% 12.4% 13.3% 11.9%
    Staff costs 3.1% 4.6% 3.3% 4.0%
    Power & Fuel 20.8% 21.3% 19.7% 19.3%
    Transportation & handling 14.1% 13.3% 13.1% 13.6%
    Other expenditure 13.6% 11.2% 13.5% 11.5%

  • On the back of favourable pricing scenario and robust demand, the operating margins of the company have expanded by 450 basis points (4.5%) during 3QFY08, from 32.7% in 3QFY07 to 37.2% in 3QFY08. Though the company is amongst the lowest cost cement producer in the country, rising power and freight charges continue to pressurise margins. To tackle this problem, it has installed additional windmills and captive power plants. Barring power and fuel and staff costs, all the other cost as a percentage of sales were lower compared to 3QFY07.

  • The net profit of the company grew by 62% YoY during the quarter on account of robust growth in operating profits and reduced interest expenditure. Increased cash flow from operations has resulted in lower interest charges during the quarter. Higher other income have off set the impact of higher depreciation charges, which have come in higher due to capital expenditure plans outlined by the company.

What to expect?
The company is setting up a cement plant in Tamil Nadu and also setting up additional clinkering facility in the state by installing a 4,000 TPD kiln to take its total production capacity to 10 MTPA at an investment outlay of approximately Rs 10 bn. While this is a positive for the long-term, in the medium-term, this is expected to pressurize net margins, as interest and depreciation costs will increase. Further, any decline in realisations will affect company adversely as the current growth is led more by improved sales realizations more than anything else.

In our view, the company needs to diversify its operations across regions to de-risk revenues. At the current price of Rs 3,920, the stock is trading at EV/ton of US$ 120 as per our FY10 estimates, which is at the fag end of our valuation band. Therefore, we believe that the risk-reward equation is skewed towards risks at the current juncture.

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