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Madras Cem: Muted Sales, drop in margins - Views on News from Equitymaster
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Madras Cem: Muted Sales, drop in margins
Jul 29, 2013

Madras Cements has announced its financial results for the quarter ended June 2013 (1QFY14). The company's sales and net profits have reported a decline of 2.5% YoY and 44% YoY, respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Net sales decline by 2.5% YoY during the quarter ended June 2013 (1QFY14).
  • Operating profits decline by 36.1% YoY. Operating margins decline from 31.1% in 1QFY13 to 20.4% in 1QFY14.
  • Other income increases by 272.2% YoY, while interest expenses decline by 17.1% YoY.
  • At the bottomline level, net profits drop by 44% YoY during the quarter.

Financial performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 9,848 9,601 -2.5%
Expenditure 6,781 7,640 12.7%
Operating profit (EBITDA) 3,067 1,961 -36.1%
EBITDA margin 31.1% 20.4%  
Other income 78 289 272.2%
Depreciation 781 757 -3.1%
Interest 543 450 -17.1%
Profit before tax 1,821 1,043 -42.7%
Tax 591 355 -40.0%
Effective tax rate 32.4% 34.0%  
Profit after tax 1,230 689 -44.0%
Net profit margin 12.5% 7.2%  
No of shares (m) 238.0 238.0  
Diluted EPS (Rs)*   14.7  
P/E (times)*   11.5  
*trailing twelve month earnings

What has driven performance in 1QFY14?
  • Madras Cements reported 2.5% YoY decline in the topline during the quarter ended June 2013 (1QFY14). The company has not provided volume details for the quarter.

  • Operating expenses grew by 12.7% YoY during the quarter. All major cost heads witnessed significant inflationary pressure. As a result, the company’s operating (EBITDA) margins declined by 1,070 basis points (10.7%) from 31.1% in 1QFY13 to 20.4% in 1QFY14. It must be noted that other expenditure includes Rs 60 m towards CSR activities.

    Operating cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Raw Material Consumption 1,427 1,616  
    Change in Inventory (143) 88  
    Total Raw Material Cost 1,284 1,704 32.7%
    % of net sales 13.4% 17.7%  
    Employee Cost 449 539 20.0%
    % of net sales 4.6% 5.6%  
    Power & Fuel 2,083 2,116 1.6%
    % of net sales 21.2% 22.0%  
    Transportation & Handling 1,922 2,049 6.6%
    % of net sales 19.5% 21.3%  
    Other Expenditure 1,042 1,232 18.2%
    % of net sales 10.6% 12.8%  
    Total operating expenditure 6,781 7,640 12.7%
    % of net sales 68.9% 79.6%  

  • Other income increased by 272.2% YoY during the quarter.

  • Both depreciation charges and interest expenses declined by 3.1% YoY and 17.1% YOY during the quarter.

  • Led by weak operating performance, the company’s net profits for the quarter declined by 44% YoY. Net profit margins declined by about 530 basis points from 12.5% in 1QFY13 to 7.2% in 1QFY14.

  • In compliance with the interim order passed by the Competition Appellate Tribunal, the company has deposited Rs 258.6 m, which is 10% of the penalty imposed by the Competition Commission of India on the company for alleged cartelisation with select cement manufacturers. Given that the final judgment is still pending, the company has not made any provisions for the same.

What to expect?

Madras Cements reported muted topline growth during the quarter owing to the overall sluggishness in the cement sector. Margins were also impacted by lower cement realisations and high operating costs. While cement demand is likely to remain subdued in the current fiscal, we expect cement demand to grow at about 7% over the next few years.
At the current prices of Rs 169 the stock is trading at 11.5 times its trailing twelve month earnings. We change our view on the company from ‘Sell’ to ‘Hold’ from a 3-year perspective.

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