Madras Cements, one of the most efficient cement producers in the country has announced a strong performance in the June quarter. The company has reported a 14% topline growth which has led to an even stronger 87% rise in bottomline for the June quarter on a YoY basis. While there has been no significant improvement in operating margins, reduction in interest expenses has contributed positively to the bottomline improvement.
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The company has indicated that its volumes for the June quarter have risen by 5%. This indicates that realisations have actually shown an improvement in the southern states. While the management has indicated that cement prices in its key market (Tamilnadu) have shown a marginal decline compared to same period last year, prices in other states like Kerala, Karnataka and Andhra Pradesh have actually improved. For FY04 we have assumed a volume growth of 9% and a realisations growth of 5% for Madras Cement in our projections. As the demand supply mismatch is slowly clearing up, we believe that cement prices are likely to improve from here on.
The operating profits of the company have improved by nearly 15%. Operating margins on the other hand, have remained more or less stable. Higher volumes have led to higher expenses and consequently there has not been a significant improvement in operating margins. However, going forward with improvement seen in realisations and continuing cost cutting measures we are likely to see further improvement in the company's operating margins. For our FY04 estimates, we have arrived at an operating margin of 25.7% for the company (23.8% in FY03).
While operating margins have held ground, savings in interest cost has resulted in improved profitability for Madras Cements' in the June quarter. The company has pared interest costs by 10% in 1QFY04. Since average interest cost of the company stood at 9.2% in FY03, we believe that there is room for further reduction in interest expenses and consequently improvement in bottomline performance for FY04.
At Rs 5,661, the stock is trading at a P/E of 16.7x its annualised 1QFY04 earnings. The Madras Cements stock has risen significantly in the recent past, 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. As the worst seems to have passed for the company as far as realisations are concerned, investors could look forward to a better performance from the company going forward.
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