Chettinad Cement

Chettinad Cement has increased capacity but concern over surplus supply in south remains

THE Rs 1,142-crore, Chennai-based Chettinad Cement Corporation, which is controlled by M A Ramaswamy & Associates, has been aggressively ramping up capacity to take advantage of rapid growth in cement consumption in southern markets.

The company had brought on stream an additional two million tonnes of capacity in the fourth quarter of FY09 at Ariyalur district, Tamil Nadu. This has doubled its total installed capacity to nearly four million tonnes. In addition, the company will soon add another two million tonnes and the full benefit of these expanded capacities will be felt from FY10 and onwards. During FY10 alone, the company is expected to add nearly Rs 525 crore, or 46%, to its revenues thanks to higher sales volume.

BUSINESS:

Chettinad’s installed cement capacity will shortly reach 6 million tonnes, and it has also started installation of an additional cement grinding unit with a capacity of 0.5 million tonnes. As part of its rapid expansion, Chettinad Cement invested nearly Rs 1,200 crore during FY07 and FY09, while its cash flows were Rs 596 crore during this period. Capex has, however, been more aggressive and its debt to equity ratio was 1.92 at the end of March ‘09, compared to 1.2 at the end of March ‘07.

The expansion strategy has come at a time when cement consumption in Tamil Nadu alone, had a CAGR of nearly 25% between FY 06 and FY 09. The company’s board has also given inprinciple approval for expanding cement capacity by an additional two million tonnes in Tamil Nadu. The cost of this facility has been estimated at Rs 500 crore by analysts and cash flows from recent additional capacities are adequate for financing this capex.

FINANCIALS:

Between March ‘06 and March ‘09, the company’s total operational income grew at a CAGR of 33% to Rs 1,142.3 crore, but net profit lagged behind. For the year ended March ‘09, it reported a net loss of Rs 4.2 crore as compared to a net profit of Rs 40.1 crore, three years earlier. This net loss in the previous financial year was due to a change in its method of depreciation calculation. During September ‘09 quarter, the company’s operating profit margin improved by 530 basis points y-o-y to 41.4%.

VALUATIONS:

At current price, Chettinad Cement trades at just 2.2 times its operating profit in the last four trailing quarters. Other players like India Cements trade at three times trailing operating profit, while Madras Cements trades at 2.5 times.