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Madras Cem: Lower base effect boosts profits - Views on News from Equitymaster

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Madras Cem: Lower base effect boosts profits
Feb 6, 2012

Madras Cement has announced its financial results for the third quarter and nine months ended December 2011. The company has reported a rise of 28% YoY and 77% YoY in net sales and net profits. Here is our analysis of the results:

Performance summary
  • Revenue rise by 28% YoY during the third quarter of the financial year 2011-12 (3QFY12) on account of better volumes and higher cement realisations.
  • Operating profits surge by 40% YoY as operating costs grow at a lower rate than sales.
  • Net profits increase by 77% YoY due improved operating performance.
  • During the nine month period ended December 2011, sales and net profits increase by 21% YoY and 94% YoY respectively.


Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Net sales 5,792 7,410 27.9% 19,185 23,242 21.1%
Expenditure 4,311 5,336 23.8% 14,710 16,052 9.1%
Operating profit (EBITDA) 1,481 2,075 40.1% 4,475 7,190 60.7%
EBITDA margin 25.6% 28.0%   23.3% 30.9%  
Other income 62 48 -22.6% 217 203 -6.8%
Depreciation 542 613 13.1% 1628 1880 15.5%
Interest 350 374 6.9% 1050 1275 21.4%
Profit before tax/(loss) 651 1,136 74.4% 2,014 4,238 110.4%
Tax 216 367 - 542 1374 153.4%
Profit after tax/(loss) 435 768 76.7% 1,472 2,864 94.6%
Prior period & Extraordinary items - -   - 4  
Net profit 435 768 76.7% 1,472 2,860 94.3%
Net profit margin 7.5% 10.4%   7.7% 12.3%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         14.7  
P/E (times)*         9.0  
(*trailing twelve month earnings)

What has driven performance in 3QFY12?
  • Madras Cement's topline grew by 27.9% YoY during the third quarter of the financial year 2011-12 (3QFY12). The strong growth was on the back of a 10% YoY rise in cement realisations and about 18% YoY rise in sales volume to 1.7 m tonnes. It must be noted that due to poor market conditions in the corresponding quarter of the previous fiscal (3QFY11), the company had reported a sales volume decline of about 20% YoY. As such, the lower base effect has boosted the performance in this quarter.

  • At the operating level, profits rose by 40.1% YoY during 3QFY12. Barring transportation & handling costs and other expenditure, all major cost heads witnessed a decline (as a percentage of net sales). The company's operating (EBITDA) margins rose from 25.6% in 3QFY11 to 28% in 3QFY12.

    (Rs m) 3QFY11 3QFY12 Change
    Raw Material Consumption 719 786 9.4%
    % of net sales 12.4% 10.6%  
    Employee Cost 427 431 0.9%
    % of net sales 7.4% 5.8%  
    Power & Fuel 1486 1766 18.9%
    % of net sales 25.7% 23.8%  
    Transportation & Handling 954 1314 37.7%
    % of net sales 16.5% 17.7%  
    Other Expenditure 725 1038 43.1%
    % of net sales 12.5% 14.0%  
    Total operating expenditure 4311 5336 23.8%
    % of net sales 74.4% 72.0%  

  • At the bottomline level, net profits for the year surged substantially by 76.7% on account of improved operating performance. Net profit margins rose from 7.5% in 3QFY11 to 10.4% in 3QFY12.

What to expect?
On account of a lower base in the corresponding quarter of the previous financial year (3QFY11), the current quarter's performance has received a boost. Despite weak demand and excess capacity in the South Indian market, the company has been able to keep cement realisations buoyant through production discipline. However, given that the South Indian cement market has the highest level of demand-supply mismatch, we expect cement prices to witness some pressure going forward.

At the current price of Rs 132, the stock is trading at 9 times its trailing twelve month earnings. We maintain a cautious view on the stock from a 2-3 years perspective.

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