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Madras Cements: Taxing times! - Views on News from Equitymaster
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Madras Cements: Taxing times!
Oct 31, 2005

Performance summary
Madras Cements announced its September quarter results during the weekend. The company reported a 26% YoY growth in topline, while its bottomline registered a growth of 44% YoY. This is despite the pressure on operating margins, which fell by 60 basis points during the quarter compared to the corresponding quarter of the previous fiscal. The company has announced an interim dividend of 50% i.e. Rs 5 per share on face value of Rs 10 per share.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 1,961 2,461 25.5% 3,711 4,660 25.6%
Expenditure 1,539 1,947 26.5% 2,820 3,641 29.1%
Operating Profit (EBDITA) 422 514 21.8% 891 1,018 14.3%
EBITDA margin (%) 21.5% 20.9%   24.0% 21.9%  
Other income 8 10 22.9% 24 20 -16.9%
Interest 89 70 -21.4% 168 141 -16.1%
Depreciation 168 166 -1.3% 339 331 -2.4%
Profit before tax 173 288 66.7% 407 566 39.0%
Tax 42 100 138.1% 105 198 87.7%
Profit/(Loss) after Tax 131 188 43.8% 302 369 22.0%
Net profit margin (%) 6.7% 7.6%   8.1% 7.9%  
No. of Shares (m) 12.1 12.1   12.1 12.1  
Diluted earnings per share* 43.3 62.3   100.0 122.1  
Price to earnings ratio (x)         10.9  
(* annualised)            

Madras Cements, with a total capacity of nearly 6 MT (million tonnes), caters exclusively to the southern region of the country with Kerala and Tamil Nadu being its principal markets. It controls 14% of the total cement capacity in the southern region and is amongst the largest players. 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 2QFY06?
Robust topline: The company reported a robust 26% YoY growth in topline during the quarter, thanks to the continued revival in demand being witnessed in the southern parts of India on the back of the construction boom being witnessed in the region. It must be noted that Madras Cements caters exclusively to this region. Since the company does not provide its volume numbers, it would be difficult for us to comment on the same.

Cost break-up (% of net sales)
  2QFY05 2QFY06 1HFY05 1HFY06
Inc/Dec in stock in trade 1.6% -2.4% -0.1% -0.3%
Raw material consumed 16.2% 15.2% 15.9% 14.5%
Staff costs 5.5% 4.9% 5.3% 4.7%
Power & Fuel 26.7% 28.9% 26.5% 27.2%
Transportation & handling 11.0% 16.3% 11.0% 15.5%
Other expenditure 17.4% 16.3% 17.5% 16.6%
Total expenses 78.5% 79.1% 76.0% 78.1%

Margins down: Led by the steep rise in transportation & handling charges from 11% as percentage of net sales in 2QFY05 to over 16% in 2QFY06 and aided by the rise in power and fuel costs (see table above), the operating margins of the company during the quarter came under pressure. However, this hit on margins was curtailed to some extent owing to the improvements seen under other cost heads like raw materials, staff costs and other expenses. Thus, in the end, operating margins were lower by about 60 basis points YoY.

Higher tax outgo slows bottomline: Aided by the savings in interest costs and flat depreciation charges YoY, the profit before tax (PBT) was higher by 67% YoY during the quarter. However, a sharp rise in the tax incidence, from about 24% of PBT in 2QFY05 to about 35% in 2QFY06, curtailed the bottomline growth.

What to expect?
At Rs 1,330, the stock is trading at a price to earnings multiple of about 11.6 times our estimated FY07 earnings (approx. US$ 82 on the basis of EV/ton), which is way above the valuation band we deem fit for the company. However, going forward, with no significant new capacity coming up in this region over the next couple of years and the consumption pattern having shown strength, the demand-supply scenario is likely to improve. This augurs well for cement prices in the region, going forward. Thus, though the company is expected to register strong profit growth over the next couple of years, we believe at the current juncture, much of this has already been priced into the stock.

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