Madras Cem: Low operating costs aid margins - Views on News from Equitymaster

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Madras Cem: Low operating costs aid margins

Aug 12, 2011

Madras Cement has announced its financial results for the quarter ended June 2011. The company has reported a rise of 10% YoY and 35% YoY in net sales and net profits. Here is our analysis of the results:

Performance summary
  • Revenue rise by 10% YoY during the first quarter of the financial year 2011-12.
  • Operating profits increase by 27% YoY as operating costs subside.
  • Net profits surge by 35% YoY due to improved operating performance.

Financial performance snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 6,972 7,642 9.6%
Expenditure 5,048 5,198 3.0%
Operating profit (EBITDA) 1,925 2,444 27.0%
EBITDA margin 27.6% 32.0%  
Other income 50 58 17.3%
Interest 350 476 36.0%
Depreciation 537 642 19.4%
Profit before tax/(loss) 1,087 1,384 27.3%
Tax 361 401 11.2%
Profit after tax/(loss) 726 983 35.4%
Net profit margin 10.4% 12.9%  
No of shares (m)   238.0  
Diluted EPS (Rs)*   9.9  
P/E (times)*   8.8  
* trailing twelve month earnings

What has driven performance in 1QFY12?
  • Madras Cement's topline reported a rise of 9.6% YoY during the first quarter of the financial year 2011-12. The company witnessed a decline of 5.3% in cement sales volume. However, a 15.7% rise in cement prices helped topline growth.

  • At the operating level, profits increased by 27% YoY during 1QFY12 due to lower operating expenses. Barring raw material costs, all major cost heads witnessed a decline (as a percentage of net sales). The company's operating (EBITDA) margin rose from 27.6% in 1QFY11 to 32% in 1QFY12.
  • Operating cost break-up
    (Rs m) 1QFY11 1QFY12 Change
    Raw Material Consumption 838 1180 40.9%
    % of net sales 12.0% 15.4%  
    Employee Cost 394 416 5.6%
    % of net sales 5.6% 5.4%  
    Power & Fuel 1742 1632 -6.3%
    % of net sales 25.0% 21.4%  
    Transportation & Handling 1225 1172 -4.4%
    % of net sales 17.6% 15.3%  
    Other Expenditure 849 799 -5.9%
    % of net sales 12.2% 10.5%  
    Total operating expenditure 5048 5198 3.0%
    % of net sales 72.4% 68.0%  

  • At the bottomline level, net profits for the quarter surged substantially by 35% on account of better realisations and lower operating expenses. Net profit margins rose from 10.4% in 1QFY11 to 12.9% in 1QFY12.

What to expect?

Though the current set of numbers has come as a positive surprise, the trend may not last longer. It is important to note that the higher margins have come on the back of low operating expenses during the quarter. However, given the inflationary scenario, operating expenses are expected to go up going forward. The south Indian cement market has the highest level of demand-supply mismatch. Hence, cement prices will be under pressure. To add further to the worries, cement volume sales have witnessed a decline. Overall, the outlook for the cement industry looks bleak in the short to medium term.

At the current price of Rs 88, the stock is trading at 8.8 times its trailing twelve month earnings. We are currently reviewing the company and shall soon update our research report on the same.

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