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Madras Cements: Buoyancy continues… - Views on News from Equitymaster

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Madras Cements: Buoyancy continues…

May 31, 2007

Performance summary
Madras Cements, a major player in South India, reported robust numbers during 4QFY07 and full year ended FY07. The topline of the company witnessed growth of 45% YoY and the operating margins of the company have expanded by 820 basis points (8.2%) during 4QFY07 on account of favourable pricing scenario and robust demand. However, 540 basis points expansion in net margins is lower compared to expansion in EBITDA margins on account of higher depreciation charges and lower other income. The performance of the company for the for the full year is also quite impressive with topline increasing by 56% YoY, while operating margins and net margins expanding by 1,440 basis points and 1,180 basis points respectively, again on account of improved realisations and strong demand.

Financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 2,998 4,350 45.1% 10,085 15,742 56.1%
Expenditure 2,327 3,018 29.7% 7,978 10,184 27.6%
Operating profit (EBITDA) 672 1,332 98.3% 2,106 5,558 163.9%
EBITDA margin 22.4% 30.6%   20.9% 35.3%  
Other income 16 14 -15.0% 49 75 53.7%
Interest 91 60 -34.3% 344 228 -33.5%
Depreciation 148 182 23.2% 652 719 10.3%
Profit before tax/(loss) 449 1,104 145.8% 1,160 4,686 304.0%
Extraordinary items 7 -   7 -  
Tax 117 394 238.0% 363 1,606 342.9%
Profit after tax/(loss) 326 710 118.0% 790 3,080 289.8%
Net margin 10.9% 16.3% - 7.8% 19.6% -
No of shares (m) 12 12   12 12  
Diluted EPS (Rs)*         257  
P/E (times)         10.8  

What is the company's business?
Madras Cements has a total capacity of 6 MT (million tonnes) and caters exclusively to the southern markets, with Kerala and Tamil Nadu being its principal markets. It accounts for 4% of the total cement capacity in the country. The company has 4 manufacturing facilities. The larger units are in Tamil Nadu (TN) and Andhra Pradesh (AP) while the mini cement plant is in Karnataka. It also has two ready mix concrete (RMC) plants near Chennai. It was the first company in south India to convert all its capacity to the dry process. While the company's management has constantly created value for its shareholders, it has not looked beyond the southern markets to diversify geographically, which is a useful strategy for a commodity business like cement.

What has driven performance in 4QFY07?
Strong topline growth: The topline of the company witnessed a growth of 45%YoY during 4QFY07 and 56% YoY for the full year FY07. This was on the back of strong demand for cement during FY07 in the southern region, which benefited the company. The cement consumption in the region registered an impressive 13% YoY growth during FY07. It must be noted that Madras Cements being a key player in the southern states of India has gained 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 year, volume sales could be in line with the industry. Thus, the company’s topline growth can be attributed to strong realisations along with increased volumes.

Cost break-up (% of net sales) 4QFY06 4QFY07 FY06 FY07
Raw material consumed 16.0% 14.4% 15.2% 13.6%
Staff costs 3.9% 4.3% 4.6% 3.6%
Power & Fuel 22.5% 19.6% 25.2% 19.7%
Transportation & handling 18.0% 16.7% 16.8% 14.1%
Other expenditure 17.2% 14.5% 17.4% 13.7%
Total expenses 77.6% 69.4% 79.1% 64.7%

Realisation led expansion in margins: On the back of favourable pricing scenario and robust demand, the operating margins of the company have expanded by 820 basis points (8.2%) during 4QFY07, from 22.4% in 4QFY06 to 30.6% in 4QFY07. Though the operating profits have witnessed stellar 98% YoY growth, the rise in costs has been camouflaged by the higher realisations. All the cost heads put pressure on margins during the quarter. Apart from raw materials and transportation costs, the company had to tackle rising staff costs that have increased by 60%Yoy during 4QFY07. Similar is the case for full year, where operating margins have expanded by 1,440 basis points (14.4%) on the back of improved realisations during the year and costs have increased by 27%YoY.

Operating margin expansion coupled with reduced finance charges has enabled the company to register almost 20% net margins for the year. Had not the other income grown by almost 54% YoY, net margins would have been tad lower. However, 540 basis points expansion in net margins during 4QFY07 is lower compared to expansion in EBITDA margins on account of higher depreciation charges and lower other income.

Over the last few quarters: On the recent quarterly trend, it has been a volatile show on the margin front and is a common sight amongst cement companies. Cement realization started gaining pace in January 2006 and thereafter, there was no looking back for cement manufacturers. With an improved pricing scenario, the company continued to report a robust topline growth and strong margins. We expect this trend to continue in the short-term, once the announced capacities come onstream, the scenario is likely to change due to supply overhang.

Over the last few quarters 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07
EBITDA margin 22.3% 39.7% 38.9% 32.7% 30.6%
Net profit margin 10.9% 23.1% 22.1% 17.4% 16.3%

What to expect?
The company is setting up a cement plant in Tamil Nadu with a capacity of 2 MTPA at an estimated cost of Rs 6 bn. It is also setting up additional clinkering facility in the state by installing a 4,000 TPD kiln to increase its production capacity by 2 MTPA at an estimated investment of Rs 4.4 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.

Post the expansion, the company’s total capacity will touch 10 MTPA. In our view, the company needs to diversify its operations across regions to de-risk revenues. At the current price of Rs 2,779, the stock is trading at EV/ton of US$ 93 as per our FY09 stimates, which in our view makes it fairly valued.

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