Chettinad Cement

Cement prices have recovered sharply in South India and Chettinad Cement is an attractive bet for medium to long-term investors

THE REVIVAL in cement demand in the southern region over the past few weeks, coupled with a sharp improvement in price is expected to help players such as Tamil Nadu-based Chettinad Cement Corporation. For instance, in Chennai, prices are currently ruling at Rs 245-250 per bag levels, as compared to Rs 190-195 per bag in early December 2009, as per various estimates.

We had recommended the stock in our issue dated November 9, 2009, and since then, the stock has gained nearly 34% and we believe that there is still potential upside in this stock over the medium term. The stock currently trades at about 2.9 times its trailing fourquarter operating profit, which is lower than its peers such as India Cements and Madras Cements. In addition, Chettinad Cement currently trades at about 4.6 times its trailing book value, compared to a range of 3.5 and 5.6 times between March 2006 and March 2009.

CAPACITY & EXPANSION PLANS: Chettinad Cement’s capacity was 4 million tonnes (MT )at the end of March 2009, double from two years earlier. The company’s plants are situated in Tamil Nadu, and it largely serves the home market and neighbouring states. In addition, the company in September 2009 had commissioned an additional 2 MT capacity in Tamil Nadu and to reach a total capacity of 6 MT.

The company had invested Rs 1,200 crore between March 2007 and March 2009 for capacity expansion, but its operational cash flow during this period was just Rs 594 crore. As a result, its leverage ratio was 1.9 at the end of FY09 as compared to 1.2 two years earlier. The company has drawn up plan to further expand its capacity. And its board in May 2009 had given approval for expanding capacity by an additional 2 MT in Tamil Nadu. However, details regarding financing and cost of this project are sketchy.

The cost of this facility is estimated to be around Rs 500 crore and should be implemented over the next 2-3 years. Nevertheless, additional net sales estimated at Rs 650 crore during FY11 alone from expanded capacities are expected to help Chettinad finance this expansion plan.
However, the company is expanding its capacity at a time when cement capacity in the southern region is expected to rise from 78 MT at the end of FY09 to 120 MT by March 2012, as per various brokerage house estimates and there are fears of oversuupply in this region.

FINANCIALS : Chettinad Cement, along with other players in the south grappled with sluggish demand in the December 2009 quarter and that was due to signs of slowdown in implementation of government-funded projects in southern states and flooding in some regions.

As a result, its realisations declined nearly 11.7% y-o-y to Rs 3,149 per tonne in the third quarter of FY10, at a time when its dispatches grew 29.1% y-o-y. The company had kept key operational costs, such as power & fuel, under check in the third quarter and it helped its operating profit margin improve by 80 basis points yo-y to 36.8% in the December 2009 quarter. However, over the past 6-8 weeks, analysts point out to a bounce back in cement demand in the southern region.

VALUATIONS: Chettinad Cement at CMP, trades at about 2.9 times its trailing four-quarter operating profit, while India Cements trades at 4.2 times and Madras Cements trades at 3.2 times. Investors could consider Chettinad Cement with a medium to long-term horizon.