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Madras Cements: Top up, bottom down - Views on News from Equitymaster

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Madras Cements: Top up, bottom down

Oct 24, 2008

Performance summary
  • Topline grows by 34% YoY during 2QFY09 led by robust growth in volumes and realisations.

  • Operating profits grow by a meager 6.4% YoY. Higher costs of operations have arrested growth in operating profits.

  • Net profit declines by 6% YoY. Higher interest costs and depreciation charges cause damage. If one excludes the two-fold growth in other income, net declines by 8.5% YoY.

Financial performance snapshot

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 4,977 6,644 33.5% 9,671 12,793 32.3%
Expenditure 2,832 4,361 54.0% 5,698 8,282 45.3%
Operating profit (EBITDA) 2,145 2,282 6.4% 3,973 4,512 13.6%
EBITDA margin 43.1% 34.4%   41.1% 35.3%  
Other income 28 55 100.7% 48 69 44.9%
Interest 81 303 276.0% 161 499 209.9%
Depreciation 257 310 20.7% 496 625 25.9%
Profit before tax/(loss) 1,836 1,725 -6.0% 3,363 3,457 2.8%
Tax 627 589 -6.0% 1,149 1,181 2.8%
Profit after tax/(loss) 1,209 1,136 -6.0% 2,214 2,275 2.8%
Net margin 24.3% 17.1%   22.9% 17.8%  
No of shares (m)**       12 238.0  
Diluted EPS (Rs)*         17  
P/E (times)         3.8  
*trailing twelve month earnings

**In 2QFY09, no of shares have been adjusted for sub-division of equity shares of Rs 10 each into 10 equity shares of Rs 1 each and issue of bonus shares in the ratio of 1:1

What has driven performance in 2QFY09?
  • Madras Cements reported topline growth of nearly 34% YoY. The company has not published volume numbers, hence it would be difficult to comment on the same. However, Madras Cements being a major player in the southern region must have benefited from the favourable demand scenario witnessed in the southern region. The southern region has witnessed approximately 10% YoY growth in demand during 1HFY09.

    Cost break-up
    Cost break-up (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw material consumed 529 788 49.0% 1126 1682 49.4%
    Staff costs 170 289 69.8% 361 509 41.1%
    Power & Fuel 887 1549 74.6% 1746 2817 61.3%
    Transportation & handling 655 910 39.0% 1331 1788 34.4%
    Other expenditure 591 825 39.6% 1135 1486 30.9%
    Total expenses 2,832 4,361 54.0% 5,698 8,282 45.3%

  • The overall cost of operation increased by 54% YoY, which led to the 8.7% fall in the EBITDA margins. As a result, the operating profits witnessed a tepid 6% YoY growth. The general increase in price level led to increase in the cost of operation. The rising fuel and power costs steadily increased the pressure on operating margins of the company.

  • Lower operating margins, higher interest costs and depreciation charges led to 7% YoY contraction in net margins and consequently 6% YoY fall in net profits. The company is undertaking capacity expansions and for the same it has leveraged its balance sheet. The debt to equity ratio, considering long term plus short-term debt, of the company stood at 1.7 in FY08 as against 1 in FY07.

  • If one excludes the two-fold growth in other income witnessed during 2QFY09, decline in net profits would have been higher at 8.5% YoY.

    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 near Ariyalur. The project also includes installing wind electric generators for an aggregate capacity of 74 MW. Taking into account the planned capital investments and factoring maintenance capex that would be needed, the company would spend approximately Rs 15 bn.

    The outlined expansion plans would 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 65, the stock is fairly valued at an EV/ton of over Rs 3,100 as per our FY11 estimates.

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    Mar 22, 2019 (Close)


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