Stock Review: Madras Cements

 

Madras Cements has benefited from a sharp revival in cement prices due to production discipline in the southern region

 

MADRAS Cements is a leading player in the southern region. It has benefited from a substantial revival in cement realisations on a per tonne basis in this region during the third quarter.

   This was largely due to the production discipline of players operating in the southern regionin a bid to ensure production levels are broadly in tune with demand conditions in this region during the quarter ended December 2010. This resulted in a visible improvement in the operating margins and net profit for players like Madras Cements in the third quarter.

   This was in sharp contrast to a rather lackluster performance of players in the South during the first half of current financial year, when surplus production led to a fall in realisations on a per tonne basis. We had recommended the stock in our issue dated June 21, 2010. Since then the stock has declined nearly 8.7% compared to a 3.4% rise in the broader Sensex. Madras Cements currently trades at a substantially lower P/E than its peers in the southern region.

CAPACITY:

The company's installed cement capacity at the end of March 2010 stood at 10.5 million tonne, a rise of 31.3% from two years earlier. Madras Cements' key markets are Tamil Nadu and Andhra Pradesh. The company will also shortly bring on stream an additional capacity of 2 MT at Tamil Nadu, at a cost of nearly 630 crore. This would bring its capacity to nearly 12.5 MT.

   The company's smaller windmill division accounted for just 6% of its total segment sales in the first nine months of current financial year. The company had invested 3,487.2 crore during March 2007-March 2010, while its cash flow during this period was 2,105 crore. As a result, its debt-equity ratio was 1.8 times at the end of March 2010, higher than three years earlier.

SOUTHERN MARKET DYNAMICS:

The total southern cement capacity is currently estimated at over 100 MT, nearly double the levels prevailing at the end of April 2005. The southern region has the largest regional market, which accounts for one-thrid of the country's total capacity of nearly 272 MT at the end of December 2010. However, players in the region grappled with sluggish demand conditions during the three quarters ended September 2010, leading to a substantial fall in realisations on a per tonne basis during the period.

   Realisations showed distinct sign of revival in the third quarter. Also, rainfall in several parts of this region curtailed cement production during the period. For instance, in November, total southern dispatches fell 12.5% year-on-year, while in December they fell 14.3%, according to brokerage reports.

   As a result, across the southern region, total dispatches grew barely 1.1% during the period April 2010 to January 2011, well below the 4% growth reported on all-India basis during this period. It remains to be seen if production discipline and strong cement realisations continues, going forward. Also, a shift to ad-valorem structure announced in the recent Union Budget is expected to result in higher duties for cement companies, said analysts. The profitability of cement players will depend on the extent to which they can pass on the rising costs to user sectors.

FINANCIALS :

The company's operating margin improved 700 basis points to 26% in the third quarter, despite flat net sales at 583 crore in the quarter. To the company's credit, its realisations improved an estimated 26.2% year-on-year to 3,907 tonne in the quarter, helped by curtailed production volumes. Higher realisations also enabled the company to deal with higher input costs, like power and fuel costs on a per tonne basis in the quarter.

   Madras Cements' despatches fell nearly 19% year-on-year to 1.45 MT in the December 2010 quarter. However, higher realisations helped its net profit jump 171% y-o-y to 43.5 crore in the quarter.

VALUATIONS:

Madras Cements trades at a P/E of 12.7 on a trailing four-quarter basis. The other large player in this region like India Cements trades at a P/E of more than 30, while Chettinad Cement trades at a P/E of 20.7.