If the company is able to sustain a higher level of cement production, and there is no reason that it cannot do so, then its financials will be on a much better wicket
Part of a larger agglomeration
Madras Cements is a part of a larger agglomeration going under the brand name of RAMCO. The board of directors is chaired by P R Ramasubrahamaneya Raja. His son, P R Venketarama Raja, who is a board member, is also a director of 28 other limited liability companies. The list of directorships' includes ten companies with the prefix Ramco or Sri Ramco and one other with the prefix RSL Enterprises. And, what do you know, the list includes nine companies incorporated off- shore-from South Africa, to Canada, USA, Switzerland, Sri Lanka, Malaysia and Singapore, and one incorporated in FZ-LLC which presumably means Free Zone - Limited Liability Company, but it makes no mention of the country of residence. Many of them appear to be closely held companies, and probably they are all a part of the overall group. Another schedule avers that the companies over which the promoters exercise significant influence and with which it has transactions during the year number only nine. (The inter-se transactions within the group appear to be of a minor nature). It must also be noted that the chairman of the board is also one of the most highly paid executives of any Indian corporate - MNC or desi with a gross remuneration of Rs 293 m in 2011-12.This payout alone works out to 17.1% of all employee remuneration during the year! Phew!
Mercifully, the total book value of the company's total investments in corporates amounts to only Rs 662 m. Of this sum, Rs 655 m is plonked down in three listed group companies - Rs 205 m in Ramco Industries, Rs 369 m in Ramco Systems Ltd, and Rs 81 m in Rajaplayam Mills. It also has an investment of Rs 221 m in a company sporting the name of AP Gas Power Corporation Ltd. But this investment does not appear to be a part of the group holding. But, it has stood guarantees to the tune of Rs 2.62 bn for loans amounting to Rs 2.30 bn that three group companies (Ramco Systems, Sandhya Spinning Mills, and Thanjavur Spinning Mills) have availed of from banks (the guarantee figure appears to be greater than the loans obtained). The company avers that the guarantees given to banks for loans availed of by them are not prejudicial to the interests of the company. So quite obviously, Madras Cements is the mother hen of the group. The group investments, it may be noted, yields very low returns, and it is a cross that the company has to bear.
The auditor's report also very vaguely states that the company has granted loans to and taken loans from one party listed in the register under Sec 301 of the Companies Act. The loans granted aggregate to Rs 1 bn and the loans taken aggregate to Rs 203 m during the year. The loans in reality appear to relate to sums advanced or taken in relation to the promoter directors' of the company. Why does the company couch such pertinent information in very guarded language and not reveal the names of those who have benefited from such transactions? This would amount to inadequate corporate disclosure I guess. It is, of course, great fun to be a successful promoter for sure.
The financial highlights
It is not just the family set up that makes for interesting reading. The ten year highlights of its financials are just as illuminating. The cement manufacturing capacity rose 75% to 105 lac tons in 2011-12 from 60 lakh tons over the base year 2002-03. (The capacity has risen by a further 20 lac tons since the commencement of the new year).The cement production on the other hand rose 114% to 75.2 lac tones from 35.2 lac tons over this period. The percentage increase anomaly is due to the erratic level of production each year over the decade. The capacity utilisation was as low as 59% in 2002-03, hit a high of 95% in 2006-07, fell to 65% in 2008-09, and registered an utilisation of 72% in the latest year. The company has no explanation to offer on its inability to operate its plants at a uniform capacity utilisation. The company also generates in house wind power, and the surplus power is fed into the grid.
The cement manufacturing capacity is spread across eight locations and spans the three states of Tamil Nadu, Andhra Pradesh, and Karnataka. Three of these plants are mere grinding units converting the clinker into cement. As things stand the factory at Jayanthipuram, Andhra Pradesh appears to be the largest unit with a capacity to manufacture 17.5 lac tonnes of clinker. But in the current year the factory in Ariyalur, Tamil Nadu, will upstage it with the commissioning of the new 2 m ton capacity unit.
Relative to the percentage increase in production, the net sales including other income rose 422% over this period, to Rs 32.87 bn, implying that overall, the realisations were much improved. (The management was so enamoured at the company crossing the Rs 30 bn revenue mark that they made a very specific note of this achievement pontificating that the company has crossed the trois mille milestone). The rise in the operating profit was infinitely more lustrous, growing 526% to Rs 9.7 bn. The rise in the net profit is the stuff of dreams - from Rs 130 m to Rs 3.8 bn or an increase of 2872%. But this phenomenal percentage increase is basically due to an extra low denominator in the base year. The dividend payout too has accelerated from Rs 73 m to Rs 596 m. Inspite of the fact that the highest revenues, the highest operating profit, and the highest net profit were all drummed up in 2011-12; it was not exactly as smooth sailing during the course of the decade. For example the revenues, operating profits, and net profits, moved in an erratic pattern in the last five years, and the company recorded its highest market capitalisation in 2007-08.
Its product basket
Besides cement, it makes and sells ready mix concrete, dry mortar, and generates electricity and also sells the latter. But the sums that it generates from these assorted side shows may well remain just that. All the titbits together added up to Rs 1.3 bn in the overall concoction. It also exports cement to Sri Lanka. The net rupee sales rose 24.2% to Rs 32.6 bn while the other income amounts to a piddling Rs 310 m. The three main input costs are power and fuel, transport and handling, and, packing materials. That is to say the three major expenses on board excluding that is the outlay on employee benefits. All the three expenses rose at a slower pace than the increase recorded in revenues. The other significant benefit that it received was in the payout on interest costs on its sizeable borrowings. The borrowings of all hues at year end amounted to Rs 27.1 bn against Rs 27.9 bn previously. The marginally lower level of borrowings is inspite of the sizeable addition to gross block of Rs 5.7 bn during the year. The interest rate that it paid out would have averaged a low 5.1% during the year against an even lower 5% previously. This is an abysmally low but a very welcome percentage rate of interest to pay, and, this appears to be the reality of the matter. And if this is indeed the rate of interest that it is paying out, then the company should be loading itself with more debt and then putting the monies into the debt securities market. No interest charges have been debited to capital account during the year, so any interest seepage on this count is ruled out.
It did however lose more than a few pennies on the forex front against a gain on this count in the preceding year. The expenditure amounted to Rs 268 m which is in part debited to finance costs and the other part to the 'Other Expenses' account. Depreciation is another item of cost on which one cannot take a call on. It rose marginally in the latest year over that of the preceding year. But this expense item may take a huge leap into the unknown in the current year running, as the new plant comes on stream. The wonder however is that the company can generate the needed margins on the input/output ratios that it contends with. At year end it had a gross block of Rs 56.71 bn excluding capital assets grouped under the capital work- in-progress category. The revenues that it generated, excluding excise taxes, amounted to Rs 32.56 bn. That is to say a ratio of 1:0.6.This would appear to be about as asset heavy as it can get. O.K there is the depreciation factor to contend with but that is really a hypothetical issue. (There is also the new capital asset block not under utilisation as yet). Even if one takes the net block figure of Rs 40 bn into consideration, it is still a very asset heavy concoction.
Separately it has some land assets which are clubbed under the heading of Non Current Assets. This includes land valued at Rs 1.4 bn and building valued at Rs 425 m. The building has been given on operating lease. To whom has it been given, pray, and what is the purpose of this exercise? Post depreciation the net block has been valued at Rs 1.77 bn. Why has this asset been separately classified? Besides, the company does not appear to have separately booked any lease rental income.
Cash flow generation
The fun thing really is that the company generated enough cash flow from its operations to more than meet its rather ample capex requirements for the year. The net cash flow of Rs 8.6 bn not only took care of capex spend of Rs 5.7 bn, but took care of all other exigencies too. The scene was marginally different in the preceding year as the capex spend was substantially higher at Rs 8.4 bn on the one hand, and the lower generation of cash on the other. How it is able to generate the cash flow is due to a medley of reasons. For one, the current assets at year end were lower than the current liabilities. For another, the inventories and the trade receivables were rather marginal given the operational size of the company. This would have helped the company to not only save on working capital interest costs, but also save on funds to be set aside for working capital. By all accounts these are the signs of a well run company, the less than satisfactory capacity utilisation notwithstanding.
The company has an outstanding equity base of Rs 238 m which is totally out of sync with its operational base. Broken down it works out to 237.96 m shares of Rs 1 each.(The low capital base is compounded by a low dividend payout of 18% of post tax profits against an even lower 16.4% in the preceding year). In this low paid up capital base, the promoter holding is 42.3%.The paid up capital is complemented with humungous reserves and surplus of Rs 20.26 bn. It last issued bonus shares in 2008-09. The company says that the volume of trade in its shares in the secondary markets - NSE and BSE together-in 2011-12 amounted to 11.8 m shares. That accounts for roughly 5% of the total number of shares outstanding. The share price on the other hand gyrated from a low of Rs 76 in July 2011 to a high of Rs 169 recorded in February 2012.That works out to a pretty steep band.
Overall this appears to be a professionally run company minus the several glitches that it has to endure.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.