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Madras Cements: Margins take a hit - Views on News from Equitymaster
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Madras Cements: Margins take a hit
Aug 3, 2010

Madras Cements has announced its 1QFY11 results. The company has reported a 6% YoY decline in topline and a 48% YoY drop in net profits. Here is our analysis of the results.

Performance summary
  • Sales for the full year fall by 6% YoY.
  • Operating costs continue to grow at a faster pace compared to the growth in topline.
  • As a result, operating profit growth declines by 34% YoY.
  • At the net level the company suffers with a nearly 48% YoY drop in profits. This is on account of higher depreciation costs.

Rs (m) 1QFY10 1QFY11 Change
Net sales 7,423 6,972 -6.1%
Expenditure 4,529 5,048 11.4%
Operating profit (EBITDA) 2,894 1,925 -33.5%
EBITDA margin 39.0% 27.6%  
Other Income              28             50 75.9%
Interest           375          350 -6.7%
Depreciation           451          537 19.2%
Profit before tax/(loss)        2,097       1,087 -48.2%
Tax           713          361 -49.3%
Profit after tax/ (loss)        1,384          726 -47.6%
Net margin (%) 18.6% 10.4%  
No of shares (m)           238          238  
Diluted EPS (Rs)*           12.1  
P/E (times)              8.3  
* (trailing twelve month earnings)

What has driven performance in 1QFY11?
  • Madras Cements reported 6% YoY decline in revenues during 1QFY11. The company does not publish volume numbers and hence it is difficult to comment on the same. Madras Cements is a major player in the southern region.

  • Operating profits fell by 34% YoY. Growth in cost of operation exceeded growth in topline. Higher cost of operation exerted pressure on EBITDA margins that declined by 11% to 27.6% in 1QFY11. While the company was able to contain cost of transportation and raw materials, profitability was impacted due to increase in employee, power and fuel, and other costs.

    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw material consumed 924 1,020 10.4%
    Staff costs 327 394 20.3%
    Power Fuel 1,408 1,742 23.7%
    Transportation handling 1,097 1,225 11.7%
    Other expenditure 746 849 13.9%
    Total expenses 4,501 5,230 16.2%

  • Due to a fall in operating profits as well as an increase in depreciation, profit after tax (PAT) reported decline of 48% YoY. The increase in other income as well as decrease in interest costs could not do much in terms of offsetting the decline.

  • There was a definite slowdown in construction activity this quarter due to a normal monsoon and a slowdown in construction activities. Falling cement prices also added to the unfavourable mix. Prices are likely to remain soft in Southern India as compared to other parts of the country.

What to expect?
Cement prices in Southern India are likely to remain soft due to over capacity in the region. A lot of capacity also came on stream during CY09. The situation is unlikely to improve in the near term. In view of over capacity and low prices in the South, many cement companies are exporting the produce to the North Eastern states where prices are higher. However, this is not likely to help improve margins, as travel and transportation expenses would subsequently rise. At the current price of Rs 100, the stock is trading at an EV/tonne of little over Rs 3,166 as per our FY13 estimates, which makes it fairly valued.

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