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Madras Cements: Driven by realisations - Views on News from Equitymaster

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Madras Cements: Driven by realisations

Jun 30, 2008

Performance summary
  • Topline grows by 28% YoY in FY08 on the back of increased volumes and firm prices.
  • Operating profits grow by 35% YoY led by a 2.1% expansion in EBITDA margins.

  • Despite higher interest costs and depreciation charges, net profits grow by 33% YoY exceeding topline growth.

  • The company recommends total dividend of Rs 40 per share (dividend yield of 1%).

  • The board proposes bonus issue in the ratio of 1:1 and subdivision of shares of Rs 10 each to Re 1 each

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 4,350 5,300 21.8% 15,742 20,119 27.8%
Expenditure 3,018 3,656 21.1% 10,184 12,596 23.7%
Operating profit (EBITDA) 1,332 1,644 23.4% 5,558 7,523 35.4%
EBITDA margin 30.6% 31.0%   35.3% 37.4%  
Other income 14 27 97.8% 75 95 25.8%
Interest 60 275 361.9% 228 517 126.5%
Depreciation 182 212 16.5% 719 933 29.7%
Profit before tax/(loss) 1,104 1,183 7.2% 4,686 6,168 31.6%
Tax 394 421 6.8% 1,606 2,085 29.9%
Profit after tax/(loss) 710 762 7.4% 3,080 4,083 32.5%
Net margin 16.3% 14.4%   19.6% 20.3%  
No of shares (m)       12 12  
Diluted EPS (Rs)*         343.1  
P/E (times)         7.9  
* trailing twelve month earnings

The company has not declared the fourth quarter numbers. However we have calculated the same by taking the difference between the full year results and nine-month performance of the company.

What has driven performance in FY08?
  • Madras Cements reported 28% YoY growth in topline on the back of volume growth and better realisations. While the company does not provide its volume sales numbers, as per CMA (Cement Manufacturers’ Association) the production and dispatch volumes increased by almost 3% YoY. The growth in volumes was a tad lower compared to the industry, which grew by almost 8% in FY08. The company is operating at optimum utilization levels, hence there is little or no headroom left to bolster volumes. While the company has outlined capacity expansion plans to raise the capacity to 10 MTPA, the same would come on stream in FY09 if the execution goes as per schedule. Thus, improved realisations were instrumental in boosting topline growth.

    Cost break-up
    (% of net sales) 4QFY07 4QFY08 FY07 FY08
    Raw material consumed 14.4% 13.5% 13.6% 12.3%
    Staff costs 4.3% 4.0% 3.6% 4.0%
    Power & Fuel 19.6% 23.0% 19.7% 20.3%
    Transportation & handling 16.7% 15.9% 14.1% 14.2%
    Other expenditure 14.5% 12.6% 13.7% 11.8%

  • The operating profits grew by 35% YoY as costs grew at a slower pace as compared to topline growth. Lower raw material costs and other expenditure (as percentage of sales) were instrumental in the expansion of operating margins by 2.1%. Rising crude prices resulted in increased power and fuel costs and transportation charges. On a cost per tonne basis, the power and fuel costs and transportation costs increased by 28% YoY and 25% YoY respectively. Capacity expansion plans and rising inflation led to the rise in employee costs. The employee cost on a cost per tonne basis increased by 39% YoY, the highest amongst the cost heads. Thus, these cost heads scaled up the overall operational cost that grew by almost 20% YoY on a cost per tonne basis.

  • Apart from sustained demand and favourable pricing scenario, the company’s initiative to reduce dependence on captive generators (which utilize furnace oil) by utilizing wind farms and thermal power plants to generate power has boosted operating profits. Thus, improved realisations and the management efforts to contain costs have resulted in the 2.1% expansion in EBITDA margins.

  • Despite higher interest costs and depreciation charges, net profits grew by 33% YoY exceeding topline growth. The same was the effect of robust growth in operating profits.

What to expect?
The company is setting up a cement plant in Tamil Nadu and is also setting up additional clinkering facility in the state by installing a 4,000 TPD kiln to take its total production capacity to 10 MTPA at an investment outlay of approximately Rs 10 bn. This will not only help Madras Cements cater to the increasing demand for the commodity but will also help the company sustain its market share. While this is a positive from a long-term perspective, in the medium term the company is expected to witness pressure on margins on account of higher interest and depreciation costs. Further, as the planned capacities become operational, the current high realisations are not likely to be sustained.

At the current price of Rs 2,700, the stock is trading at an EV/ton of US$ 86 (Rs 3,380) as per our FY10 estimates. Going forward, we expect volumes to drive the overall performance of the company. At the current levels the stock seems fairly valued and hence caution needs to be exercised.

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Mar 19, 2019 11:53 AM


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