Stock Review: Madras Cements

 

 

The stock of Madras Cements, a leading player in the South, has underperformed the broader market over the past three months and that's despite a rather buoyant operating environment for the company. Typically, during the monsoon season, cement prices weaken due to the curtailment of construction activity. However, this year, cement players in the southern region have maintained a strict production discipline, and this, in turn, has helped cement prices remain rather firm, even with the onset of the monsoon season.

For instance, during April '11, aggregate cement despatches in the South declined nearly 6% YoY compared to a 0.3% decline on an all-India basis, point out broking house reports. Similarly, during the year ended March 11, cement despatches in the South grew barely 1.1% YoY substantially lower than the all-India growth during this period.

This, in turn, has helped players like Madras Cements get improved realisations even during the monsoon season. For instance, in its key market Chennai, cement prices are currently at . 270 per bag levels, about 5-6% higher than in the peak construction season at the start of this calendar year. Also, in other markets like Hyderabad, prices are ruling at . 260 per bag levels, a rise of 5% during the same period. Higher realisations should help the company deal better with rising input costs, like coal and freight charges, during the June '11 quarter.
However, analysts are skeptical whether cement realisations would continue at these levels, as the monsoon season progresses. Its larger rival in the South — India Cements — has also seen its stock price underperform the broader market over the past three months.

Earlier, during the March '11 quarter, Madras Cements operating profit margin improved 440 basis points YoY to 26.5% at a time when its net sales also grew 20.7%. This was largely due to its realiations per tonne that improved nearly 21% to . 4,009 in the March 11 quarter, at a time when its despatches fell 15% YoY in the quarter.

Madras Cements at . 88 per share trades at a P/E of 9.9 times on a trailing four-quarter basis and we are neutral on the stock. In contrast, India Cements trades at a P/E of more than 35 times on a trailing basis and is expensive.