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Madras Cem: Non-operating items boost PAT - Views on News from Equitymaster

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Madras Cem: Non-operating items boost PAT

May 24, 2012

Madras Cements has announced its financial results for the fourth quarter and full year ended March 2012. The company has reported a rise of 33% YoY and 55% YoY in net sales and net profits during the quarter. Here is our analysis of the results:

Performance summary
  • Revenues rise by 33% YoY during the fourth quarter of the financial year 2011-12 (4QFY12) as the South Indian market shows signs of recovery from the downcycle.
  • Operating margins decline owing to higher logistics and other expenses.
  • Higher other income and lower interest expenses help bottomline to register a surge of 55% YoY.
  • During the financial year ended March 2012, sales and net profits increase by 24% YoY and 83% YoY respectively.

Financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 6,864 9,119 32.9% 26,049 32,361 24.2%
Expenditure 5,164 7,123 37.9% 19,875 23,179 16.6%
Operating profit (EBITDA) 1,700 1,996 17.4% 6,174 9,182 48.7%
EBITDA margin 24.8% 21.9%   23.7% 28.4%  
Other income 181 314 73.9% 398 517 29.9%
Depreciation 580 659 13.7% 2208 2539 15.0%
Interest 343 310 -9.7% 1393 1585 13.8%
Profit before tax/(loss) 958 1,341 40.1% 2,972 5,575 87.6%
Tax 321 350 9.0% 863 1723 99.7%
Profit after tax/(loss) 637 992 55.7% 2,109 3,852 82.6%
Prior period & Extraordinary items -1 1   -1 1  
Net profit 638 991 55.4% 2,110 3,851 82.5%
Net profit margin 9.3% 10.9%   8.1% 11.9%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         16.2  
P/E (times)*         8.4  
*trailing twelve month earnings

What has driven performance in 4QFY12?
  • Madras Cements reported a topline growth of 32.9% YoY during the fourth quarter of the financial year 2011-12 (4QFY12). The strong growth was on the back of recovery in volumes as well as prices.

  • However, the company could not fully pass on the rise in operating costs during the quarter. Transportation & handling costs (20.4% of sales) and other expenditure (14.8% of sales) rose substantially by 2.3% YoY and 3.8% YoY (as a percentage of net sales). Other expenditure during the quarter included a forex loss of Rs 101.6 m. The company’s operating (EBITDA) margins declined from 24.8% in 4QFY11 to 21.9% in 4QFY12.

    Operating Cost break-up
    (Rs m) 4QFY11 4QFY12 Change
    Raw Material Consumption 1154 1420 23.0%
    % of net sales 16.8% 15.6%  
    Employee Cost 348 436 25.4%
    % of net sales 5.1% 4.8%  
    Power & Fuel 1664 2057 23.6%
    % of net sales 24.2% 22.6%  
    Transportation & Handling 1240 1857 49.8%
    % of net sales 18.1% 20.4%  
    Other Expenditure 758 1353 78.5%
    % of net sales 11.0% 14.8%  
    Total operating expenditure 5164 7123 37.9%
    % of net sales 75.2% 78.1%  

  • Other income rose sharply by 73.9% YoY during the quarter. On the other hand, interest expenses declined by 9.7 YoY. The effective tax rate during 4QFY12 was also down by 7.4% YoY. Owing to these non-operating items, the company's net profits for the quarter surged by 55.4% YoY. Net profit margins rose from 9.3% in 4QFY11 to 10.9% in 4QFY12.

  • The company's board of directors has approved a final dividend of Rs 0.5 per share. Along with the interim dividend of Rs 2 which has been already paid, the total dividend per share for the financial year 2011-12 amounts to Rs 2.5.

What to expect?
Madras Cements has reported a significantly improved performance for the financial year 2011-12 as compared to the previous year. The worst may be over for the South Indian market. However, there are several issues plaguing the market that may keep growth and profitability under pressure. As per the company's new chief executive officer (CEO) A V Dharmakrishnan, the major challenges facing the sector are logistics, capacity utilisation and brand building. Distribution costs have shot up sharply and now account for as much as manufacturing cost. So the company plans to prioritise measures for bringing this operating head under control. It plans to have its own dedicated fleet of lorries. The other focus area for the company is to increase its capacity utilisation levels to 90-95% levels from the current 70% level.

As far as the company's capacity expansion plans are concerned, it plans to raise its capacity from the current 12 million tonnes (mt) to 20 mt over the next four to five years. This would entail an investment of about Rs 30 bn which would be funded through a mix of debt and internal accruals. Moreover, the company is also considering setting up a plant in the north. This may be a shift in the company's strategy as it has hitherto restricted its focus solely on the southern markets. It is also planning to set up a packaging plant in Sri Lanka.

At the current price of Rs 136, the stock is trading at 8.4 times its trailing twelve month earnings. We maintain a cautious view on the stock from a 3-year perspective.

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