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Madras Cements: Better among the lot - Views on News from Equitymaster
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Madras Cements: Better among the lot
Aug 5, 2008

Performance summary
  • Topline grows by 31% YoY during 1QFY09 led by robust growth in volumes and realisations.
  • Costs continue to grow at a faster pace as compared to the topline resulting in a 2.7% contraction in EBITDA margins.
  • Lower other income, higher interest costs and depreciation charges cause the net profit growth (up 13% YoY) to be a tad lower than the 22% YoY growth in operating profits.


Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 4,694 6,150 31.0%
Expenditure 2,866 3,921 36.8%
Operating profit (EBITDA) 1,828 2,229 22.0%
EBITDA margin 38.9% 36.2%  
Other income 20 14 -31.2%
Interest 81 197 143.9%
Depreciation 239 315 31.5%
Profit before tax/(loss) 1,528 1,732 13.4%
Tax 522 592 13.4%
Profit after tax/(loss) 1,006 1,140 13.3%
Net margin 21.4% 18.5%  
No of shares (m) 12 12  
Diluted EPS (Rs)*   354.4  
P/E (times)   5.6  
* trailing twelve month earnings

What has driven performance in 1QFY09?
  • Madras Cements reported robust growth in topline in 1QFY09 on the back of strong growth in volumes and realisations. The strong demand for the commodity led to the 16% YoY growth in realisations during 1QFY09. While the company does not provide its volume sales numbers, as per CMA (Cement Manufacturers’ Association) the production and dispatch volumes reported growth of nearly 13% YoY. The company has expanded its installed capacity by 2 MTPA towards the end of FY08. The same seems to have enabled the company to cater to the increasing demand for the commodity.

    Cost break-up

    (% of net sales) 1QFY08 1QFY09
    Raw material consumed 12.7% 14.5%
    Staff costs 4.1% 3.6%
    Power & Fuel 18.3% 20.6%
    Transportation & handling 14.4% 14.3%
    Other expenditure 11.6% 10.7%

  • Rising cost of operations is an industry wide issue. The steep increase in fuel costs such as diesel and coal has led to the overall increase in the manufacturing cost and cost of distribution. The company is dependant on captive generator sets apart from wind farm energy to generate power. However, the increase in the furnace oil has raised overall captive power generation costs. On account of these factors, the overall cost of operation has increased by nearly 37% YoY, while on a cost per tonne basis, the cost of operation has witnessed growth of 20% YoY. Despite the current inflationary situation witnessed within the economy and the expansion plans under progress, the company was able to contain its employee costs and transportation and handling charges, which is noteworthy. Thus, it was the rising fuel charges that took toll on the company’s profitability resulting in a 2.7% contraction in EBITDA margins in 1QFY09.

  • The company is undertaking capacity expansions and for the same it has leveraged its balance sheet. As indicated by the company, the company’s debt to equity ratio stood at 1.2 in FY08 as against 0.7 in FY07. Thus, the increased interest costs and depreciation charges further exerted pressure on the company’s profitability. Though the company reported a 13% YoY growth in net profits, net margins contracted by 2.9%.

What to expect?
During FY08, the company expanded its installed capacity by 2 MTPA to almost 8 MTPA. The company is now progressing with another 2 MTPA cement capacity expansion plan near Ariyalur at an estimated cost of nearly Rs 11 bn. The project also includes installing wind electric generators for an aggregate capacity of 74 MW. This will not only help Madras Cements cater to the increasing demand for the commodity but will also help the company 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 2,604, the stock is fairly valued at an EV/ton of US$ 70 (Rs 2,803) as per our FY11 estimates. While valuations have corrected to some extent, the risk-reward matrix is still skewed towards the former.

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