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Madras Cements: Cost control boost margins - Views on News from Equitymaster

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Madras Cements: Cost control boost margins

Oct 27, 2009

Performance summary
  • Revenues grow by 27.6% YoY during 2QFY10 on account of increase in volumes with increase in capacity.
  • Lower growth in costs led to 47.3% YoY growth in operating profits
  • Despite increase in corporate costs (depreciation, interest, etc) net profits grow at a faster rate of 49.6% YoY.
  • The company has approved interim dividend of Rs 1.5 per share. This translates into dividend yield of 1.4% at the current levels.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 6,644 8,480 27.6% 12,793 16,163 26.3%
Expenditure 4,361 5,119 17.4% 8,282 9,908 19.6%
Operating profit (EBITDA) 2,283 3,361 47.3% 4,512 6,255 38.7%
EBITDA margin 34.4% 39.6%   35.3% 38.7%  
Other income 55 54 -1.4% 69 83 19.5%
Interest 303 375 23.9% 499 750 50.2%
Depreciation 310 475 53.1% 625 925 48.1%
Profit before tax/(loss) 1,725 2,566 48.8% 3,457 4,663 34.9%
Tax 589 867 47.2% 1,181 1,580 33.7%
Profit after tax/(loss) 1,136 1,699 49.6% 2,275 3,083 35.5%
Net margin 17.1% 20.0%   17.8% 19.1%  
No of shares (m)**       11.9 238.0  
Diluted EPS (Rs)*         18.7  
P/E (times)         5.9  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • Government initiatives on infrastructural spending and stimulus packages announced earlier sustained demand for cement. The demand has largely remained strong in rural and semi urban areas. Madras Cements does not publish volume numbers and hence it is difficult to comment on the same. However, we believe the company being a major player in the southern region must have benefited from the sustained demand for the commodity. It had commissioned 0.72 m tonnes grinding capacity situated in Salem district of Tamil Nadu, which must have also enabled the increase volumes. The southern region was facing some logistics issues, power cut problems and correction in input prices toward the end of 2QFY10. Despite these constraints, the company has reported 27.6% YoY growth. The same must have primarily been backed by improved volumes.

  • The costs of key inputs like fuel have remained more or less stable. Crude prices cooled off towards the end of CY08. The benefit of the same has started flowing in, as the companies within the industry have cleared out the earlier high cost inventory. However, the cost heads and cost of other inputs have scaled up, owing to which overall cost of operation went up by 17.4% YoY. As costs grew at a slower pace compared to topline, EBITDA margins expanded by 5.3% in 2QFY10 to 39.6% (34.4% in 2QFY09).

  • Good show at the operating level has boiled down to the bottomline as depreciation, interest costs grew at a slower pace. Growth in net profits stood at 49.6% YoY.

What to expect?
Madras Cements has achieved its capacity expansion target and as of now has no other capacity expansion plans. The expansion plan would not only help Madras Cements to cater to the increasing demand for the commodity, but will also help it 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.

The company has fared well as compared to our expectations on account of slower growth in costs. Even after factoring in the benefits of stable input costs, the stock is trading at the fag end of the valuation band. At the current price of Rs 111, the stock is trading at an EV/ton of little over Rs 4,000 as per our FY12 estimates.

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