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Madras Cements: Realisations still linger - Views on News from Equitymaster

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Madras Cements: Realisations still linger
Jul 24, 2009

Performance summary
  • Revenues grow by 24.9% YoY during 1QFY10 on account of firm prices and sustained demand for the commodity.
  • The impact of softening of key input costs like fuel has arrested growth in operating cost. This has resulted in a 1.4% expansion in EBITDA margins.
  • While operating profits grow by 29.6% YoY, bottomline grew by only 21% YoY. This is mainly on account of higher depreciation and interest costs.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 6,164 7,696 24.9%
Expenditure 3,921 4,790 22.2%
Operating profit (EBITDA) 2,243 2,907 29.6%
EBITDA margin 36.4% 37.8%  
Other income - 17  
Interest 197 376 91.3%
Depreciation 315 451 43.2%
Profit before tax/(loss) 1,732 2,097 21.1%
Tax 592 713 20.3%
Profit after tax/(loss) 1,140 1,384 21.5%
Net margin 18.5% 18.0%  
No of shares (m)** 11.9 238.0  
Diluted EPS (Rs)*   16.3  
P/E (times)   7.1  
*trailing twelve month earnings

Note: **In 1QFY10 no of shares has been adjusted for sub-division of equity shares of Rs 10 each into 10 equity shares of Rs 1 each and issue of bonus shares in the ratio of 1:1.

What has driven performance in 1QFY10?
  • Madras Cements reported a topline growth of 24.9 YoY during 1QFY10. Delayed monsoons and ongoing infrastructure activity has sustained the demand for the commodity. Madras Cements does not publish volume numbers and hence it is difficult to comment on the same. However, the company is a major player in the southern region, which is facing logistics issues. Moreover, due to elections in Tamil Nadu and power cuts in this region cement manufacturers were unable to utilize capacity optimally. The company’s three plants are situated in Tamil Nadu, the region that reported flat growth, while the Southern region as a whole has reported nearly 5% YoY growth in volumes. Thus, it looks like that the growth has primarily been driven by firm cement prices.

    Cost break-up
    (Rs m) 1QFY09 1QFY10 Change
    Raw material consumed 894 1154 29.1%
    Staff costs 221 327 48.4%
    Power & Fuel 1268 1408 11.1%
    Transportation & handling 878 1155 31.5%
    Other expenditure 661 746 12.8%
    Total expenses 3,921 4,790 22.2%

  • Crude prices cooled off towards the end of CY08. The benefit of the same has started flowing in, as the companies within the industry have cleared out the earlier high cost inventory. Despite this, the overall cost of operations has gone up 22.2% YoY on account of higher raw material costs (gypsum, coal, etc). Slower growth in cost of operation in comparison to topline resulted in 1.4% expansion in operating margins.

  • While operating profits reported 29.6% YoY growth, net profits growth was capped at 21% YoY largely on account of higher interest expenses and depreciation charges. The same is on the higher side as the company has expanded its capacity in 4QFY09 to 10 MTPA.

What to expect?
Madras Cements has achieved its capacity expansion target and as of now has no other capacity expansion plans. The expansion plan would not only help Madras Cements to cater to the increasing demand for the commodity, but will also help it 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 high realisations witnessed at present are not likely to be sustained.

At the current price of Rs 115, the stock is fairly valued at an EV/ton of little over Rs 3,800 as per our FY12 estimates and hence investors should practice caution while investing in the stock. We shall soon update our research report on the company.

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