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Madras Cement: Faces heat in south

Jun 10, 2002

Madras Cement has announced poor FY02 results. Its net profit for the period has declined by a sharp 45% YoY. Though the topline of the company has shown a healthy 14% growth, Madras Cement's inability to control operating costs, increased depreciation and interest expenses hit profitability. The company seems to have recovered slightly in the fourth quarter as net profits were down by just over 4%. This recovery has been due to higher dispatches in the last quarter.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales 1,714 1,603 -6.5% 6,183 7,063 14.2%
Other Income 12 8 -35.0% 25 31 23.3%
Expenditure 1,237 1,191 -3.7% 4,426 5,291 19.5%
Operating Profit (EBDIT) 477 411 -13.8% 1,757 1,773 0.9%
Operating Profit Margin (%) 27.8% 25.7%   28.4% 25.1%  
Interest 185 181 -2.1% 654 775 18.5%
Depreciation 127 148 16.5% 527 610 15.6%
Profit before Tax 177 90 -49.3% 600 419 -30.3%
Extraordinary items 0 0   0 0 -
Tax (116) (32) -72.8% (116) (150) -
Profit after Tax/(Loss) 61 58 -4.4% 484 269 -44.5%
Net profit margin (%) 3.6% 3.6%   7.8% 3.8%  
No. of Shares 1.2 1.2   1.2 1.2  
Diluted Earnings per share* 203.3 194.3   403.3 223.8  
P/E Ratio   21.7     18.9  
(* annualised)            

The topline growth seems to have been achieved due to the heavy cement demand in the last quarter of FY02. The topline growth was essentially volume driven as the realisations remained depressed through out the year. Madras Cement has got maximum exposure in the south, mainly in Kerala and Tamilnadu. In the south, demand has come mainly from the housing sector as the infrastructure projects are near completion. A slight recovery in cement prices in the last quarter has also aided the growth in topline. A considerably lower tax outgo helped the company stem decline in fourth quarter net profit.

For the whole year the interest expenses of the company increased by nearly 19%. This increase could be attributed to increased debt to finance the capacity additions of the company.The company set up a mini-cement plant in Karnataka and took up debottlenecking exercises. Consequently, Madras Cement increased its capacity by 0.9 m tonnes to 6.1 m tonnes in FY02. Depreciation provisioning also increased on account of the increase in capacity.

The company's operating expenses went up considerably. The Tamilnadu government announced a higher sales tax (24%) on cement sold above the Rs 145 price level. This increased sales tax expenditure was partly responsible for the hike in costs. However, a bulk of the cost increases came from higher raw material, power and fuel and transportation costs. A 20% growth in dispatches has led to high raw material and fuel expenses. While the dispatches are high the topline has not grown proportionately due to depressed prices in the southern states. There exists an oversupply condition in these states as majors like ACC and Gujarat Ambuja have set up large capacities in the western and the southern region which has lead to a glut of cement supply in these regions.

Operating Expenses FY01 FY02 % change
Raw material 801 1,029 28.5%
Power & Fuel 1,435 1,646 14.7%
Staff Costs 328 359 9.3%
Transportation & Handling 700 994 42.0%
Other Exp 1,163 1,262 8.5%
Total cost 4,426 5,290 19.5%

The stock is currently trading at Rs 4,225, a P/E mutiple of 19x FY02 earnings. The company is likely to face stiff competition from the heavyweights like ACC and Gujarat Ambuja, who have set up capacities in south. Owing to its south based presence, it is not easy for the company to market its brand in the western and northern markets, as the costs would be prohibitive. In the short term, the demand is likely to be robust albiet, with pressure on realisations due to a glut of supply in the region. In the long term, a lot will depend on the management's strategy to enter into new markets as the southern markets are increasingly getting saturated with supply. Market reach is likely to be the biggest stumbling block for the company.

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