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Madras Cements: March quarter surprise

Jun 23, 2003

Madras Cements, one of the largest cement producers in the southern region has reported encouraging March quarter results. It has reported a 76% jump in its bottomline on the back of a 5% rise in topline during the quarter. However, the cement major has reported a 52% drop in its bottomline for FY03 on the back of a 11% drop in its topline. Due to the better performance of the company in the December and March quarters, the full year financial performance has been salvaged to an extent.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net Sales 1,603 1,686 5.2% 7,063 6,261 -11.3%
Other Income 8 4 -47% 31 42 37%
Expenditure 1,191 1,243 4.3% 5,291 4,769 -9.9%
Operating Profit (EBDIT) 411 443 7.6% 1,773 1,493 -15.8%
Operating Profit Margin (%)25.7%26.3% 25.1%23.8% 
Interest 181 166 -8.2% 775 662 -14.6%
Depreciation 148 159 7.6% 610 640 5.0%
Profit before Tax9012134.7%419233-44.3%
Extraordinary items - -   - -  
Tax 32 19   150 104  
Profit after Tax/(Loss) 58 103 75.8% 269 130-51.7%
Net profit margin (%)3.6%6.1% 3.8%2.1% 
No. of Shares 1.2 1.2   1.2 1.2  
Diluted Earnings per share* (Rs)48.384.9 222.5107.3 
P/E Ratio (x)     46.6  
(* annualised)      

Topline performance of the company has been rather dismal in FY03. This can be attributed to the strong fall in realisations in the same period. While volumes have grown (10%) marginally above the industry average, realisations have plummeted by close to 22%. However, we would like to point out that in the last two quarters of FY03, the company has seen an improvement in realisations. The improvement in realisations in the December and March quarters may be on account of absorption of the existing overcapacity in the market, led by strong demand. Demand was further strengthened in the March and December quarters as the highway projects work shifted to the southern region.

While our estimates for FY03 factored in a higher fall in topline for FY03, our operating margin estimates were more or less in line with that reported by the company. We believe that the margin improvement seen in the company's performance in FY03 is sustainable going forward due to better pricing scenario in the southern region. Also, going forward, the growth momentum is likely to be maintained due to strong demand from the housing as well as the infrastructure sectors. Apart from improvement in cement realisations, better operating efficiencies helped the company shore up its bottomline performance in 3QFY03 and 4QFY03.

Apart from cost control at the operating level, Madras Cements has also considerably reduced its interest expenses. In FY03 interest expenses have fallen by 15%. Profitability is expected to improve further due to better operating efficiencies and falling interest expenses.

At Rs 4,995, the stock is trading at a P/E ratio of 46.6x its FY03 earnings. The Madras Cements stock has risen significantly in the last one month, seemingly on account of improvement in investor perception due to improving demand and realisations scenario. Cement demand has improved in the southern region mainly due to good demand from the highway projects. Prices too have shown a good degree of improvement in the March quarter. Having said that, we must also point out that the supply overhang still exists in the southern region, thus any improvement in cement prices from current levels, may be slow to materialise. The worst however seems to have passed for the company as far as realisations are concerned.

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