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Madras Cements: Oversupply squeezes profitability - Views on News from Equitymaster
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Madras Cements: Oversupply squeezes profitability
Oct 29, 2010

Madras Cements has announced its 2QFY11 results. The company has reported a 24% YoY decline in topline and a 82% YoY drop in net profits. Here is our analysis of the result.

Performance summary
  • Sales for the quarter fall by 24% YoY.
  • Operating costs continue to grow despite a falling topline, reducing EBITDA margin by 23%.
  • As a result, operating profit declines by 68% YoY.
  • Because of the poor performance at the operating level and higher depreciation charges, the company suffers a drop in net profits by 82% YoY.

Performance summary snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 8,480 6,421 -24.3% 16,163 13,393 -17.1%
Expenditure -5,119 -5,351 4.5% -9,908 -10,399 5.0%
Operating profit (EBITDA) 3,361 1,070 -68.2% 6,255 2,995 -52.1%
EBITDA margin 39.6% 16.7%   38.7% 22.4%  
Other income 54 105 94.4% 83 155 86.7%
Interest -375 -350 -6.7% 750 700 -6.7%
Depreciation -475 -548 15.4% -925 -1,086 17.4%
Profit before tax/(loss) 2,566 276 -89.2% 4,663 1,363 -70.8%
Tax -867 35 -104.0% -1,580 -326 -79.4%
Profit after tax/(loss) 1,699 311 -81.7% 3,083 1,037 -66.4%
Net margin 20.0% 4.8%   19.1% 7.7%  
No of shares (m)**       238 238  
Diluted EPS (Rs)*         7.1  
P/E (times)         15.4  
* (trailing twelve month earnings

What has driven performance in 2QFY11?
  • Madras Cements reported a 24% YoY decline in revenues during 2QFY11. The company does not publish volume numbers and hence it is difficult to comment on the same. Madras Cements is one of the largest players in the southern region with a 10.49 MTPA capacity.

  • Operating profits fell by 68% YoY. Growth in cost of operation coincided with a falling topline. While some operating costs remained flattish, profitability was impacted due to increased use of inventory and a hike in employee costs (20%), power and fuel (12%), and other costs.
    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    (Increase)/ Decrease in Stock & work in progress  -236 84  
    Raw material consumed 1100 1112 1.1%
    Staff costs 309 371 20.1%
    Power Fuel 1526 1715 12.4%
    Transportation handling 1193 1223 2.5%
    Other expenditure 879 845 -3.9%
    Total operating expenses 4771 5350 12.1%

  • Due to a fall in operating profits as well as an increase in depreciation, profit after tax (PAT) reported decline of 82% YoY.

  • Cement demand during the quarter was marred by a slowdown in construction activity due to a good monsoon. Poor demand coupled with surplus supply hurt cement prices severely leading to poor realisations. Supply surplus was the maximum in the southern part of the country where the company mainly does business.

What to expect?
Cement Prices in Southern India have risen significantly post the September quarter. However, companies may not be able to sustain this hike as demand is weak and is likely to remain sluggish for a while. A lot of capacity has also come on stream during the last couple of years and it will take a while before the demand can absorb all the surplus supply. The situation is likely to improve after a couple of quarters as the government's thrust on infrastructure and the revival in real estate demand are likely to support growth of the industry at around 9% over the next two to three years.

At the current price of Rs 109, the stock is trading at an EV/tonne of over Rs 3,300 as per our FY13 estimates, which makes it fairly over-valued. Hence, we maintain our cautious view on the stock.

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