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Madras Cements: Ready to capitalise

Sep 1, 2003

The year gone by (FY03) was not particularly good for the Indian cement industry from the point of view of realisations. While prices fell across the length and breadth of the country, the southern region was the worst hit as far as realisations are concerned. Madras cement is one of the leading players in the southern region and, in this article, we will try and find out how geared up the company is, in view of the increasing competition in the southern region. Madras Cements is one of the major companies of the Ramco group, which enjoys a considerable amount of brand equity in the southern markets. With a capacity of around 6 m tonnes, it is the second largest (behind India Cements) player in the southern region with Tamil Nadu and Kerala emerging as the company's major markets.

The company's performance in FY03 was far from encouraging. Although volumes recorded a 9% YoY growth, this was completely offset by a steep 22% drop in realizations. As a consequence, the topline of the company fell by around 11% while the net profits plummeted 50%. However, what is encouraging from the long-term point of view is the fact that, even in these difficult times, the company has been able to maintain its high operating margins of around 24%. This was made possible through high efficiencies and the company's resorting to greenfield expansions with contemporary operating parameters. This is likely to hold the company in good stead in the times to come and ensure that any improvement in realizations would benefit earnings.

Among all the regions, the southern region is one that has the maximum demand-supply mismatch on account of reckless capacity addition in the recent past. This has resulted in poor realizations and has affected all the major players in this region. However, if the June quarter results are any indication, things are beginning to look up. Prices are firming up, as there is no major greenfield expansion in sight in the southern region. This will not only reduce the demand supply gap, it will also result in efficient capacity utilization. There is good news on the demand front due to the highway development program reaching the southern corridors. The demand is also likely to receive a boost from the housing sector and the rural areas, as monsoons this year have been normal. Also, Grasim's acquisition of the L&T's cement division is likely to result in further consolidation in the sector, which is good for the industry.

Given the host of favorable factors in the southern markets, Madras Cements seems well placed vis-a-vis its major competitors like India cements and ACC as it enjoys superior operating margins and better capacity utilisations. Not only this, most of Madras Cements' greenfield expansion has happened without resorting to large scale borrowings, a problem plaguing the likes of India Cements whose bottomlines suffered considerable damage and has slipped to the red due to heavy borrowings in the past.


At the current market price of Rs 5,825, Madras Cements is trading at a P/E of 17.2x its annualised 1QFY04 earnings. Although this valuation seems to be on the higher side, it should be borne in mind that Madras cements is a cost efficient player and also has lower financial leverage vis-a-vis its major competitors. This puts the company in a position to gain maximum advantage of the good times that lie ahead for the cement industry in the south.

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