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Madras cements: Enhanced liquidity

Dec 18, 2003

Madras Cements, one of the most cost efficient players in the Indian cement industry, recently announced a stock split whereby the stock of the company of face value Rs 100 will be sub divided into 10 share of Rs 10 each. This is a positive move on the part of the management, as it will result in increased liquidity of the stock. Against this backdrop let us analyse the strengths and the weaknesses of this South based player. Strengths:

Low cost producer: As seen from the table below, the company is among the lowest cost producers of cement in the country. Despite the fact that the company operated at 60% capacity in FY03 and the realisations fell to 22% the same year, the company's operating margins stood at a strong 24% , one of the highest in the industry. Therefore, going forward when both, the realisations and the capacity utilisation improve, the company is likely to see further improvements in its operating margins, which would help in boosting the company's overall profitability. On account of decline in the company's profits in FY03, which resulted in a small base, the PAT of the company is expected to grow at a high CAGR of 80% in the next three years.

Strong industry prospects: The cement industry in the country is expected to grow at a rate of 8%-9% in the medium to long term on the back of strong growth in the housing sector (housing loan disbursals are growing at more than 30% annually) and government initiatives in the infrastructure sector front (National Highway Development Program, Golden Quadrilateral, port development). Moreover, the company has unutilized capacity of more than 2 m tonnes.

Therefore when this capacity will come into play, it will give a significant boost to the company's bottomline.

Weakness:

High demand supply mismatch: The company is present in the Southern region, which has an excess capacity of close to 11 m tonnes, the highest among all the regions in the country. On account of this, all the players in the region have had to contend with low realisations in the recent past. In fact in FY03, the prices fell by as much as 22%, thus impacting the profitability of the companies present in the region. It is expected that the demand supply parity will be restored in the region by around 2007. Till such time, realisations are likely to remain under pressure.

The stock of the company is currently trading at Rs 740, implying a P/E of 23.5 of its annualised 1HFY04 earnings. Madras cements has a consistent record of high operating margins and therefore we believe that it should command higher valuation as compared to its peers. However, the company's sole dependence on a market which has the highest demand supply mismatch in the country remains a concern. To avail of a detailed report on Madras Cements click here


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