Madras Cem: Strong growth, margins buoyant - Views on News from Equitymaster

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Madras Cem: Strong growth, margins buoyant

Aug 2, 2012

Madras Cements has announced its financial results for the quarter ended June 2012. The company has reported a rise of 29% YoY and 25% YoY in net sales and net profits, respectively. Here is our analysis of the results:

Performance summary
  • Revenues rise by 29% YoY during the quarter ended June 2012 (1QFY13).
  • Operating profits rise by 26% YoY. Operating margins decline marginally owing to higher logistic expenses.
  • Other income increases by 33% YoY during the quarter.
  • At the bottomline level, net profits rose by 25% YoY.

Financial performance snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 7,642 9,892.8 29.5%
Expenditure 5,198 6,826 31.3%
Operating profit (EBITDA) 2,444 3,067 25.5%
EBITDA margin 32.0% 31.0%  
Other income 58 78 33.1%
Depreciation 642 781 21.8%
Interest 476 543 14.0%
Profit before tax/(loss) 1,384 1,821 31.5%
Tax 401 591 47.2%
Profit after tax/(loss) 983 1,230 25.1%
Net profit margin 12.9% 12.4%  
No of shares (m) 238.0 238.0  
Diluted EPS (Rs)*   17.2  
P/E (times)*   10.2  
*trailing twelve month earnings

What has driven performance in 1QFY13?
  • Madras Cements reported a topline growth of 29.5% YoY during the quarter ended June 2012 (1QFY13). The strong growth was on the back of about 21% YoY growth in volumes and about 7% YoY increase in realisations. Power revenues were higher by 27.6% YoY during the quarter.
  • However, the company could not fully pass on the rise in operating costs during the quarter. Transportation & handling costs (19.4% of sales) rose substantially by 4.1% YoY (as a percentage of net sales). The company's operating (EBITDA) margins declined by 100 basis points (1%) from 32% in 1QFY12 to 31% in 1QFY13.

    Operating cost break-up
    (Rs m) 1QFY12 1QFY13 Change
    Raw Material Consumption 1180 1284 8.8%
    % of net sales 15.4% 13.0%  
    Employee Cost 416 449 8.1%
    % of net sales 5.4% 4.5%  
    Power & Fuel 1632 2128 30.4%
    % of net sales 21.4% 21.5%  
    Transportation & Handling 1172 1922 64.0%
    % of net sales 15.3% 19.4%  
    Other Expenditure 799 1042 30.4%
    % of net sales 10.5% 10.5%  
    Total operating expenditure 5198 6826 31.3%
    % of net sales 68.0% 69.0%  

  • Other income rose by 33.1% YoY during the quarter. On the other hand, depreciation charges and interest expenses increased by 21.8% YoY and 14% YoY respectively.

  • The company's net profits for the quarter rose by 25.1% YoY. Net profit margins decline by 50 basis points (0.5%) from 12.9% in 1QFY12 to 12.4% in 1QFY13.

What to expect?
Despite the excess cement capacity in the South Indian market, Madras Cements managed to deliver strong growth in its topline. At the same time, margins witnessed only a marginal decline owing to the inflationary pressures in the economy.

In an order dated June 20, 2012, the Competition Commission of India (CCI) imposed a penalty of Rs 2.6 bn on Madras Cements for alleged cartelisation and price manipulation. The company believes that it has a good case and is taking steps to appeal against the Order before the Competition Appellate Tribunal. As such, it has made no provision for the same in its books.

During the quarter, the company commissioned its 25 MW thermal power plant in Tamil Nadu.

At the current price of Rs 176.5, the stock is trading at 10.2 times its trailing twelve month earnings. We maintain our 'Sell' view on the stock from a 2-3 year perspective.

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