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Madras Cem: High realisations boost profits
Nov 8, 2011

Madras Cement has announced its financial results for the second quarter and half year ended September 2011. The company has reported a rise of 28% YoY and 256% YoY in net sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues rise by 28% YoY during the second quarter of the financial year 2011-12 on account of higher cement realisations.
  • Operating profits shoot up by 150% YoY as operating costs subside.
  • Net profits surge by 256% YoY due improved operating performance.
  • During the half year period ended September 2011, sales net profits rise by 18% YoY and 102% YoY respectively.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 6,421 8,190 27.6% 13,393 15,832 18.2%
Expenditure 5,351 5,518 3.1% 10,399 10,716 3.1%
Operating profit (EBITDA) 1,069 2,672 149.9% 2,994 5,115 70.9%
EBITDA margin 16.7% 32.6%   22.4% 32.3%  
Other income 105 96 -8.8% 155 154 -0.4%
Interest 350 425 21.4% 700 901 28.7%
Depreciation 549 625 14.0% 1086 1267 16.7%
Profit before tax/(loss) 276 1,718 522.2% 1,363 3,102 127.6%
Tax -35 605 - 326 1007 208.8%
Profit after tax/(loss) 311 1,113 257.5% 1,037 2,096 102.0%
Prior period & Extraordinary items - 4   - 4  
Net profit 311 1,109 256.3% 1,037 2,092 101.7%
Net profit margin 4.8% 13.5%   7.7% 13.2%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         13.3  
P/E (times)*         8.7  
*trailing twelve month earnings

What has driven performance in 2QFY12?
  • Madras Cement's topline reported a rise of 27.6% YoY during the second quarter of the financial year 2011-12. The strong growth was on the back of a whopping 49% year-on-year (YoY) rise in cement realisations, despite a 9% YoY decline in sales volume. It must be noted that the market conditions in the corresponding quarter of the previous fiscal were extremely poor. As such, the lower base effect boosted the performance this quarter.

  • At the operating level, profits surged by 149.9% YoY during 2QFY12 due to a significant decline in all major cost heads (as a percentage of net sales). The company's operating (EBITDA) margins rose from 16.7% in 2QFY11 to 32.6% in 2QFY12.

    Operating cost break-up
    (Rs m) 2QFY11 2QFY12 Change
    Raw Material Consumption 1196 983 -17.8%
    % of net sales 18.6% 12.0%  
    Employee Cost 372 429 15.5%
    % of net sales 5.8% 5.2%  
    Power & Fuel 1715 1849 7.8%
    % of net sales 26.7% 22.6%  
    Transportation & Handling 1223 1271 3.9%
    % of net sales 19.1% 15.5%  
    Other Expenditure 846 986 16.6%
    % of net sales 13.2% 12.0%  
    Total operating expenditure 5351 5518 3.1%
    % of net sales 83.3% 67.4%  

  • At the bottomline level, net profits for the year surged substantially by 256% on account of better realisations and low operating expenses. Net profit margins rose from 4.8% in 2QFY11 to 13.5% in 2QFY12.

What to expect?
The current set of numbers has come as a positive surprise at a time when the South Indian market continues to witness weak demand growth and excess cement capacity. Through production discipline, the company has been able to keep cement realisations buoyant which helped keep operating costs lower despite the inflationary pressures. However, given that the South Indian cement market has the highest level of demand-supply mismatch, we expect cement prices to witness pressure. Moreover, the demand slowdown and the inflationary pressure are likely to keep margins under pressure. Overall, the outlook for the cement industry is not positive in the medium term.

At the current price of Rs 116, the stock is trading at 8.7 times its trailing twelve month earnings. We are currently reviewing the company and shall soon update our research report on the same.

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