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Madras Cements: Skewed towards risks
Sep 25, 2006

Madras Cements is a major player in the blended cement category in south India, with a total installed capacity of 6 million tonnes per annum (MTPA). The company has 4 manufacturing facilities. The larger units are in Tamil Nadu (TN) and Andhra Pradesh (AP) while the mini cement plant is in Karnataka. It also has two ready mix concrete (RMC) plants near Chennai. It was the first company in south India to convert all its capacity to the dry process. The company’s cement brand is very well known in the southern markets, especially in Kerala and Tamil Nadu. In the South: The company has presence only in the southern region, which has an excess capacity, the highest among all the regions in the country. On account of this, all the players in the region fetch lower realisations as compared to other regions in the country. The performance of the company over the last five years reflects the same.

Net sales have grown at a CAGR of 9% from FY99 to FY06, bulk of which was on account of volume growth (net realization growth during the same period was just 1%). During FY06, there was a remarkable change in net realisations (up 12% YoY), as the demand-supply gap narrowed. This was further accentuated by higher exports (more than tripled to Rs 850 m or 7.1% of sales). The growth in realisations is not visible at the EBITDA level (per tonne), which reflects the fact that the price increases was largely a result of higher input costs. The EBITDA per tonne was lower by 3% CAGR. Apart from higher power costs (highly dependent on furnace oil and coal), other reasons for this decline include regional focus and taxation-related issues in Tamil Nadu.

Low cost producer: The company is one amongst the lowest cost cement producer in the country. But in the recent past, rising diesel and furnace oil prices have put pressure on EBDITA margins. During FY06, there was a steep increase in diesel price, leading to increase in the limestone raising cost, transportation cost of raw materials and finished good. To tackle this problem, it has installed additional windmills. Setting up of windmill has reduced power cost by 4% during FY06 as compared to FY05, but the company is exposed to the risk of poor power generation due to low wind velocity.

  FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
Cost/ton produced (Rs) 1,422 1,344 1,669 1,665 1,347 1,438 1,532 1,691
EBITDA per tonne (Rs) 586 560 646 544 423 430 408 448

Debt reduction saves the day: Though costs have increased in recent past, the company was still able to generate reasonable returns to the shareholders. Return on net worth improved from 7.2% in FY04 to 14.3% in FY06. This was on account of reduction in manpower and other cost cutting initiatives. Over a period of time, it also managed to reduce interest outgo as well. The debt to equity ratio has gone down from 1.7 times in FY99 to 0.7 times FY06, which is a result of improved cash flow. This, in turn, is also reflected in the Interest coverage ratio, which has gone up from 1.6 in FY99 to 4.4 FY06.

What next?
The company is setting up a cement plant in Tamil Nadu with a capacity of 2 MTPA. The estimated project cost is Rs 6.1 bn. It is also setting up additional clinkering facility in the state by installing a 4,000 TPD kiln to increase its production capacity by 2 MTPA at an estimated investment of Rs 4.4 bn. While this is a positive for the long-term, in the medium-term, this is expected to pressurize net margins, as interest and depreciation costs will increase.

Post the expansion, the company’s total capacity will touch 10 MTPA. In our view, the company needs to diversify its operations across regions to de-risk revenues. At the current price of Rs 3,250, the stock is trading at EV/ton of US$ 163, which in our view is expensive.

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