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Madras Cements: Smooth sailing… - Views on News from Equitymaster

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Madras Cements: Smooth sailing…

Oct 23, 2007

Performance summary
  • Topline grows by 23% YoY during 2QFY08 and 30% YoY during 1HFY08 on the back of sustained demand for the commodity and firm prices.
  • Operating profits jump 36% YoY during the quarter owing to favorable pricing scenario.

  • In line with the operating profit, net profit grows 34% YoY in 2QFY08.

  • The company has declared interim dividend of Rs 10 per share.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 4,073 5,002 22.8% 7,481 9,696 29.6%
Expenditure 2,490 2,857 14.7% 4,535 5,723 26.2%
Operating profit (EBITDA) 1,583 2,145 35.5% 2,947 3,973 34.8%
EBITDA margin 38.9% 42.9%   39.4% 41.0%  
Other income 17 28 62.7% 46 48 3.9%
Interest 42 81 91.7% 84 161 91.8%
Depreciation 184 257 39.9% 357 496 38.8%
Profit before tax/(loss) 1,374 1,836 33.6% 2,551 3,363 31.8%
Tax 474 627 32.4% 862 1,149 33.4%
Profit after tax/(loss) 901 1,209 34.2% 1,689 2,214 31.1%
Net margin 22.1% 24.2%   22.6% 22.8%  
No of shares (m) 12 12   12 12  
Diluted EPS (Rs)*         299  
P/E (times)         11.3  

What is the company's business?
Madras Cements has a total capacity of 6 MT (million tonnes) and caters exclusively to the southern markets, with Kerala and Tamil Nadu being its principal markets. It accounts for 4% of the total cement capacity in the country. 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. While the company's management has constantly created value for its shareholders, it has not looked beyond the southern markets to diversify geographically, which is a useful strategy for a commodity business like cement.

What has driven performance in 2QFY08?
Pricing edge continues...: Cement consumption continues to rise unabated even during the slack season (monsoon season). The company achieved topline growth of almost 23% YoY during 2QFY08 and 30% YoY during 1HFY08 on the back of sustained demand for the commodity and firm prices. The southern region has witnessed approximately 10% to 13% YoY growth in prices during 2QFY08. Madras Cements being a key player in the southern states of India must have benefited from the same. Since the company does not provide its volume sales numbers, it would be difficult for us to comment on the same. Considering the strong topline growth and consumption growth during the quarter, volume sales could be in line with the industry. Thus the company’s topline growth can be attributed to strong realisations along with increased volumes.

Cost break-up
(% of net sales) 2QFY07 2QFY08 1HFY07 1HFY08
Raw material consumed 13.5% 10.6% 12.1% 11.6%
Staff costs 3.2% 3.4% 3.5% 3.7%
Power & Fuel 18.6% 18.2% 19.2% 18.3%
Transportation & handling 12.2% 13.1% 12.5% 13.7%
Other expenditure 13.6% 11.8% 13.4% 11.7%

Favourable scenario: A favorable pricing scenario and continuous efforts to curtail costs have led to almost 36% YoY growth in operating profit. Though, the growth is witnessed at the operating profit level, cost concern continues with rising freight and transportation costs (increasing petroleum product prices in turn raise transportation costs). The rising fuel prices (input cost) have led to increase in limestone raising costs, transportation cost of raw materials as well as finished goods. While the company was able to pass on the cost increases, thus resulting into margin expansion, it might harm the company during times of falling realizations.

Boils down to the bottomline: In line with operating profits, net profits jumped 34% YoY during 2QFY08. The net profit growth was a tad lower compared to 36% YoY growth in EBITDA on account of increased finance charges. Had not the other income grown by 63% YoY, net margins would have expanded by 1.9% instead of 2.1%. The same is the case for half-yearly performance of the company as bottomline growth has come in at a slightly lower rate than the growth in operating profit, due mainly to higher interest expenses.

What to expect?
The company is setting up a cement plant in Tamil Nadu with a capacity of 2 MTPA at an estimated cost of Rs 6 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. Further, any decline in realisations will affect company adversely as the current growth is led more by improved sales realizations more than anything else.

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 4,078, the stock is trading at EV/ton of US$ 120 as per our FY10 estimates, which in our view makes it fairly valued.

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