Chettinad Cement

THE key takeway from Chettinad Cement's March 2010 quarterly result is that in the southern market, there appears to be no visible sign of improvement in the operating environment. As a result, the company's operating profit margin plummeted 2,000 basis points Yo-Y to 30.8% in the fourth quarter of FY10.

   The results were declared after the close of Tuesday's trading, but the stock had already gained 1.6% to close at Rs 584. This stock has also outperformed the broader Nifty since the start of calendar year 2010, on expectations of a revival in the operating environment in the South.

   Meanwhile, pressure on the company's operating profit margins during the quarter under review was due to a decline in realisations on a per tonne, coupled with a rising input cost, especially power & fuel.

   For instance, the company's realisations declined nearly 17% Y-o-Y to Rs 3,131 per tonne in the fourth quarter, given that its cement despatches were estimated to have increased 29.5% Y-o-Y to 1.08 million tonne. There were signs of recovery in cement demand in the South in the fourth quarter, given a pickup in implementation of government-funded infrastructure projects, but analysts also point out to a rapidly expanding capacity in this region and the resulting pressure on realisations on a per tonne basis.

   In addition, the company's key operational cost, power & fuel increased nearly 18.4% Y-o-Y to Rs 864.3 per tonne, given the rapid rise in domestic and international coal prices over the past 3-4 months. Earlier, Shree Digvijay Cement, a largely western region-focused player, had also reported a 260-basis-points Y-o-Y decline in its operating profit margin to 21.4% in the March '10 quarter, due to a fall in realisations and rising operational cost structure.

   However, in the case of Chettinad Cement, a 61.6% Y-o-Y reduction in its depreciation provision to Rs 94.1 crore in the March '10 quarter, helped the company record a net profit of Rs 7.2 crore in the quarter under review, compared to a net loss of Rs 98.3 crore a year earlier. That's because during FY09, the company had made a change in the method for calculating depreciation and coupled with the arrears in depreciation from this accounting change were included in the fourth quarter.

   Going forward, concerns remain regarding the rapid expansion in cement capacity in the South, coupled with a rising cost structure for this sector. And with the stock trading at nearly 18.9 times on a trailing four-quarter basis, it is expensive.