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Madras Cement: Higher interest costs take toll
May 25, 2010

Madras Cements has announced its FY10 results. The company has reported a 14% growth in topline but a 3% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for the full year grow by 14% YoY.
  • Costs of operation continue to grow at a faster pace compared to growth in topline.
  • As a result, operating profit growth is arrested at 10% YoY.
  • However, at the net level the company reports nearly 3% YoY fall in profits. This is on account of higher depreciation and interest costs.
  • Board recommends a final dividend of Rs 0.5 per share along with the interim dividend of Rs 1.5 per share (dividend yield of 2%).


Financial performance snapshot
(Rs m) FY09 FY10 Change
Net sales 24,562 28,009 14.0%
Expenditure 16,777 19,440 15.9%
Operating profit (EBITDA) 7,784 8,569 10.1%
EBITDA margin 31.7% 30.6%  
Other income 151 204 35.3%
Interest 1,100 1,509 37.2%
Depreciation 1,377 1,961 42.4%
Profit before tax/(loss) 5,458 5,303 -2.8%
Extraordinary income/(expense) (4) 1  
Tax 1,819 1,768 -2.8%
Net profit 3,635 3,537 -2.7%
Net margin 14.8% 12.6%  
No of shares (m) 238 238  
Diluted EPS (Rs)*   14.9  
P/E (times)   6.7  
* trailing twelve month basis

What has driven performance in FY10?
  • Madras cements reported 14% YoY growth in revenues during FY10. The company does not publish volume numbers and hence it is difficult to comment on the same. Madras Cements is a major player in the southern region. The southern region has reported 5% YoY growth. The region has reported single digit growth as Andhra Pradesh (AP) has been a laggard. AP has reported stagnant growth. On the other hand, on year on year basis Tamil Nadu has grown by 12%, Kerala by 5% and Karnataka by 6.5%.

  • Out of the total 5 plants, Madras Cementsí 3 plants are located in Tamil Nadu, one each in Karnataka and Andhra Pradesh. Considering the cement plant locations of the company, we believe that the company must have benefited on account of strong demand registered by different states, especially Tamil Nadu.

  • Operating profits grew by 10% YoY. Growth in cost of operation exceeded growth in topline. Higher cost of operation exerted pressure on EBITDA margins that declined by 1.1% to 30.6% in FY10. While the company was able to contain cost of power and fuel, profitability was impacted due to increase in raw material, employee and transport and handling costs.

  • Despite double digit growth in operating profits and higher other income, profit before tax (PBT) reported decline of 2.8% YoY. This is because of increase in interest and depreciation costs. In line with PBT, bottomline declined by 2.7% YoY.

What to expect?
The performance of southern players in the past few quarters was affected on account of elections, ongoing agitations, etc. Additionally most of the capacities have also come in during the calendar year, 2009. Thus the southern region had witnessed sharp drop in cement prices. However, the same have started firming up marginally December onwards. However, for the full year cement realisations were lower as far as southern region is considered. Volatile cement prices and higher costs impacted margins.

The company has underperformed our estimates on account of volatile cement prices and sharp increase in depreciation and interest costs. At the current price of Rs 100, the stock is trading at an EV/tonne of little over Rs 3,700 as per our FY12 estimates, which makes it fairly valued.

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