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Madras Cem: Buoyancy in growth and margins - Views on News from Equitymaster
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Madras Cem: Buoyancy in growth and margins
Nov 6, 2012

Madras Cements has announced its financial results for the quarter ended September 2012. The company has reported a rise of 22% YoY and 20% YoY in net sales and net profits, respectively. Here is our analysis of the results:

Performance summary
  • Revenues rise by 22% YoY during the quarter ended September 2012 (2QFY13).
  • Operating profits rise by 24% YoY. Operating margins decline marginally owing to higher raw material costs and logistics expenses.
  • At the bottomline level, net profits rise by 20% YoY during the quarter.
  • During the six month period ended September 2012 (1HFY13), net sales and net profits increased by 26% YoY and 22% YoY respectively.

Financial performance snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 8,190 9,995 22.0% 15,832 19,887 25.6%
Expenditure 5,522 6,855 24.1% 10,720 13,681 27.6%
Operating profit (EBITDA) 2,668 3,139 17.7% 5,112 6,206 21.4%
EBITDA margin 32.6% 31.4%   32.3% 31.2%  
Other income 96 84 -12.1% 154 162 5.0%
Depreciation 625 749 19.9% 1267 1530 20.8%
Interest 425 507 19.4% 901 1050 16.5%
Profit before tax/(loss) 1,714 1,967 14.8% 3,098 3,788 22.3%
Tax 605 638 5.5% 1,007 1229 22.1%
Profit after tax/(loss) 1,109 1,329 19.9% 2,092 2,559 22.3%
Net profit margin 13.5% 13.3%   13.2% 12.9%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         18.1  
P/E (times)*         11.8  
*trailing twelve month earnings

What has driven performance in 2QFY13?
  • Madras Cements reported a topline growth of 22% YoY during the quarter ended September 2012 (2QFY13). The strong growth was on the back of around 12% YoY growth in volume sales. The balance topline growth was on account of increase in cement price realisations. While cement revenues (94.6% of sales) grew by 22.9% YoY, power revenues (5.4% of sales) were higher by 10% YoY during the quarter.

  • Operating expenses grew at a slightly higher rate of 24.1% YoY. While power and fuel costs declined by 2.1% YoY (as a percentage of net sales), raw material costs, transportation & handling costs, and other expenses rose by 1% YoY, 1.7% YoY and 0.7% YoY respectively (as a percentage of net sales). The company's operating (EBITDA) margins declined by 120 basis points (1.2%) from 32.6% in 2QFY12 to 31.4% in 2QFY13.

    Operating cost break-up
    (Rs m) 2QFY12 2QFY13 Change
    Raw Material Consumption 983 1300 32.3%
    % of net sales 12.0% 13.0%  
    Employee Cost 429 514 19.7%
    % of net sales 5.2% 5.1%  
    Power & Fuel 1849 2044 10.5%
    % of net sales 22.6% 20.4%  
    Transportation & Handling 1271 1719 35.2%
    % of net sales 15.5% 17.2%  
    Other Expenditure 990 1279 29.2%
    % of net sales 12.1% 12.8%  
    Total operating expenditure 5,522 6,855 24.1%
    % of net sales 67.4% 68.6%  

  • Other income declined by 12.1% YoY during the quarter. On the other hand, depreciation charges and interest expenses increased by 19.9% YoY and 19.4% YoY respectively.

  • The company's net profits for the quarter rose by 19.9% YoY. Net profit margins remained almost flat at 13.3% in 2QFY13 against 13.5% in 2QFY12.

  • The company's board has approved of an interim dividend of Rs 1 per share for the current financial year.

What to expect?
Despite the excess cement capacity in the South Indian market, Madras Cements managed to deliver strong growth in its topline during the first half of the financial year 2012-13. At the same time, margins witnessed only a marginal decline owing to the inflationary pressures in the economy.

In an order dated June 20, 2012, the Competition Commission of India (CCI) imposed a penalty of Rs 2.6 bn on Madras Cements for alleged cartelisation with select cement manufacturers. The company has filed an appeal against the Order before the Competition Appellate Tribunal. An interim order has been passed that no coercive steps should be taken for recovery of penalty.

At the current price of Rs 214, the stock is trading at 11.8 times its trailing twelve month earnings. We recommend a 'Hold' view on the stock from a 2 to 3 year perspective.

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