Madras Cements

 

 

Madras Cements trades at a valuation lower than that of its peers and is a value pick for long term

 

MADRAS Cements, a leading player in the southern market, has been grappling with sluggish demand conditions in its key markets of Tamil Nadu and Andhra Pradesh, and a fall in its realisations on a per tonne basis over the past two quarters. However, the stock trades at a P/E of just 6.8 times on a trailing basis, and it is much lower than the P/E of its similar sized peers, operating in the southern.

   We had recommended this stock in our issue dated April 13, 2009 and since then the stock has gained just 33.2% as compared to a 60.2% rise in the Sensex. Also, this stock currently trades at about 1.9 times its book value for the year ended March 2009, while it has traded in a range of 3.6 and 7.3 times during the period March 2005 and March 2008.

CAPACITY:

The company's cement capacity was around 10 million tonne at the end of March 2009, a rise of 66.8% from two years earlier. In addition, the company had also brought on stream two grinding units in Tamil Nadu with a total capacity of nearly 1.3 mt over the past 6-8 months, coupled with another grinding unit with a capacity of 0.95 mt recently in West Bengal. Madras Cements had invested Rs 2,920 crore during the period March 2007 and March 2009, while its operating cash flow during this period was just Rs 1,423.5 crore. As a result, its leverage ratio was 1.85 at the end of FY09, as compared to 1.2, two years earlier.

   Madras Cements has expanded its capacity at a time when its peers in this region are also ramping up capacity, and with demand sluggish, it had put pressure on realisations on a per tonne basis in the March 2010 quarter. South-based players have grappled with sluggish implementation of governmentfunded infrastructure projects over the past 6-8 months, coupled with signs of a slowdown in rural housing projects. As a result, Madras Cements' realisations declined by 22.1% y-o-y on a per tonne basis in the fourth quarter to Rs 2,778 per tonne.

   For instance, cement capacity in the southern region was nearly 71 mt at the end of March 2010 a rise of 20.7% from a year earlier. However, as per various estimates cement dispatches in the South grew just 7.2% y-o-y to 64 mt for year ended March 2010. The southern region has the biggest capacity available across the country, out of the industry's total capacity of nearly 245 mt at the end of March 2010.

   Also, as per various estimates capacity utilisation in the southern region had already dipped to 70% levels at the end of May 2010, a decline of nearly 900 basis points y-o-y. In the cement industry, when capacity utilisation falls below 85%, price realisations decline.

   Madras Cements also had a capacity of 181.6 mw in its windmill business at the end of March 2009. Also, it contributed just 4.8% of net segment revenues for the recently ended financial year.

FINANCIALS:

Madras Cements' performance in the March 2010 quarter was adversely impacted by a 22.1% fall in its cement realisations to Rs 2,778 per tonne in the quarter under review. As a result, the company's operating profit margin declined 510 basis points to 22.1 % in the fourth quarter, while its net sales also fell 10.4% to Rs 582.2 crore. Other south-based players like Chettinad Cement's realisation fell 16% y-o-y in the fourth quarter leading to a decline in its operating profit margin. For Madras Cements, a difficult operating environment in the second half of FY10, resulted in its operating profit margin for FY10 that also declined 100 bps to 30.9%.

   Going forward, cement capacity in the south region is expected to rise to 99.2 mt by the end of FY12, however, demand is expected to lag.

VALUATIONS :

Madras Cements trades at nearly 6.8 times on a trailing four-quarter basis, while its peers India Cements trades at nearly 9.8 times and Chettinad Cement trades at 18 times. North-based player Shree Cement trades at 10.4 times. Investors could consider Madras Cements on a long-term basis.