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Madras Cem: Steady growth despite slowdown - Views on News from Equitymaster
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Madras Cem: Steady growth despite slowdown
Feb 14, 2013

Madras Cements has announced its financial results for the quarter ended December 2012. The company has reported a rise of 18% YoY and 9% YoY in net sales and net profits, respectively. Here is our analysis of the results:

Performance summary
  • Revenues rise by 17.7% YoY during the quarter ended December 2012 (3QFY13).
  • Operating profits decline by 2.5% YoY. Operating margins decline owing to higher raw material costs and logistics expenses.
  • At the bottomline level, net profits rise by 8.8% YoY during the quarter.
  • During the nine-month period ended December 2012 (9MFY13), net sales and net profits increased by 23.1% YoY and 18.7% YoY respectively.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 7,410 8,725 17.7% 23,242 28,612 23.1%
Expenditure 5,336 6,702 25.6% 16,056 20,383 27.0%
Operating profit (EBITDA) 2,075 2,022 -2.5% 7,186 8,229 14.5%
EBITDA margin 28.0% 23.2%   30.9% 28.8%  
Other income 48 343 610.6% 203 505 149.4%
Depreciation 613 695 13.3% 1,880 2,225 18.4%
Interest 374 429 14.6% 1,275 1,479 16.0%
Profit before tax 1,136 1,242 9.4% 4,234 5,030 18.8%
Tax 367 402 9.4% 1,374 1631 18.7%
Profit after tax 768 841 9.4% 2,860 3,400 18.9%
Extraordinary gains/ (loss) - -5 - - -5 -
Net profit 768 836 8.8% 2,860 3,395 18.7%
Net profit margin 10.4% 9.6%   12.3% 11.9%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         18.4  
P/E (times)*         13.1  
*trailing twelve month earnings

What has driven the performance in 3QFY12?
  • Madras Cements reported a topline growth of 17.7% YoY during the quarter ended December 2012 (1QFY13). The company has not provided volume details for the quarter. It is however mentioned that the sales volumes are affected in Kerala due to a 16-day cement dealers' strike. While cement revenues (99% of sales) grew by 17.8% YoY, power revenues (1% of sales) were higher by 13% YoY during the quarter.

  • Operating expenses grew at a higher rate of 25.6% YoY. While power and fuel costs declined by 1% YoY (as a percentage of net sales), raw material costs and transportation & handling costs rose by 3% YoY each (as a percentage of net sales). The company's operating (EBITDA) margins declined by 480 basis points (4.8%) from 28% in 3QFY12 to 23.2% in 3QFY13.

    Operating cost break-up
    (Rs m) 3QFY12 3QFY13 Change
    Raw Material Consumption 786 1184 50.6%
    % of net sales 10.6% 13.6%  
    Employee Cost 431 486 12.8%
    % of net sales 5.8% 5.6%  
    Power & Fuel 1766 1989 12.6%
    % of net sales 23.8% 22.8%  
    Transportation & Handling 1314 1807 37.5%
    % of net sales 17.7% 20.7%  
    Other Expenditure 1038 1237 19.1%
    % of net sales 14.0% 14.2%  
    Total operating expenditure 5336 6702 25.6%
    % of net sales 72.0% 76.8%  

  • Other income shot up by 610.6% YoY during the quarter. On the other hand, depreciation charges and interest expenses increased at a moderate rate of 13.3% YoY and 14.6% YoY respectively.

  • The company's net profits for the quarter rose by 8.8% YoY. Net profit margins declined by about 80 basis points from 10.4% in 3QFY13 against 9.6% in 3QFY12.

  • The company's board has approved of a second interim dividend of Rs 1 per share for the current financial year 2012-13.

What to expect?
Despite the excess cement capacity in the South Indian market, slow demand off take and cement dealers' strike in Kerala, Madras Cements managed to deliver a reasonable performance during the quarter ended December 2012. The slowdown over the short term, notwithstanding, we expect cement demand to grow at about 8% over the next few years. However, rising costs of raw materials, logistics and energy will continue to put pressure on profit margins.

At the current prices of Rs 240.6 the stock is trading at 13.1 times its trailing twelve month earnings. Based on our FY15 estimates, the stock is expected to give a return of about 5% CAGR over the next 2 years. As such, we change our view on the stock from 'Hold' to 'Sell' from a 2-year perspective.

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