Chettinad Cement

Chettinad Cement has increased capacity but concern over surplus supply in south remains

THE Rs 1,142-crore, Chennai-based Chettinad Cement Corporation, which is controlled by M A Ramaswamy & Associates, has been aggressively ramping up capacity to take advantage of rapid growth in cement consumption in southern markets.

The company had brought on stream an additional two million tonnes of capacity in the fourth quarter of FY09 at Ariyalur district, Tamil Nadu. This has doubled its total installed capacity to nearly four million tonnes. In addition, the company will soon add another two million tonnes and the full benefit of these expanded capacities will be felt from FY10 and onwards. During FY10 alone, the company is expected to add nearly Rs 525 crore, or 46%, to its revenues thanks to higher sales volume.

BUSINESS:

Chettinad’s installed cement capacity will shortly reach 6 million tonnes, and it has also started installation of an additional cement grinding unit with a capacity of 0.5 million tonnes. As part of its rapid expansion, Chettinad Cement invested nearly Rs 1,200 crore during FY07 and FY09, while its cash flows were Rs 596 crore during this period. Capex has, however, been more aggressive and its debt to equity ratio was 1.92 at the end of March ‘09, compared to 1.2 at the end of March ‘07.

The expansion strategy has come at a time when cement consumption in Tamil Nadu alone, had a CAGR of nearly 25% between FY 06 and FY 09. The company’s board has also given inprinciple approval for expanding cement capacity by an additional two million tonnes in Tamil Nadu. The cost of this facility has been estimated at Rs 500 crore by analysts and cash flows from recent additional capacities are adequate for financing this capex.

FINANCIALS:

Between March ‘06 and March ‘09, the company’s total operational income grew at a CAGR of 33% to Rs 1,142.3 crore, but net profit lagged behind. For the year ended March ‘09, it reported a net loss of Rs 4.2 crore as compared to a net profit of Rs 40.1 crore, three years earlier. This net loss in the previous financial year was due to a change in its method of depreciation calculation. During September ‘09 quarter, the company’s operating profit margin improved by 530 basis points y-o-y to 41.4%.

VALUATIONS:

At current price, Chettinad Cement trades at just 2.2 times its operating profit in the last four trailing quarters. Other players like India Cements trade at three times trailing operating profit, while Madras Cements trades at 2.5 times.

Stock views on Indraprastha Gas, HBL Power Systems, Madras Cements

Sunidhi Securities on HBL Power Systems - Target of Rs 285

"HBL Power Systems, Q3FY09, sales surged by 4% to Rs 298 crore and net profit declined by 33% to Rs 18 crore due to economic slowdown. During the nine months of FY09, sales surged by 40% to Rs 958 crore and net profit by 65% to Rs 73 crore. OP & NP margins stood at 16.6% and 7.6% respectively against 14.7% and 6.5% in FY08. We recommend 'BUY' with a target of Rs 285 in the medium term," says Sunidhi Securities & Finance's research report.

Nirmal Bang on Indraprastha Gas - Target of Rs 190

"We expect the company to earn an ROCE of 38.4% in FY10E & 40.1% in FY011E. At Rs 138.5 per share the stock is trading at a discount of 37.1% from our intrinsic price of Rs 190 per share which is 13.9x FY10E earnings & 11.4x FY11E earnings. We reiterate our 'BUY' rating on the stock with a price target of Rs 190 per share with a long term view," says Nirmal Bang's report.

Emkay Global on Madras Cements - Target of Rs 111

"Madras Cement Q4FY2009 results are sharply below our expectations primarily on account of lower than estimated topline growth, higher raw material costs and losses in the windmill division. Cement revenues increased by 20.4% yoy to Rs 6.38 billion driven by 6.8% volume growth while realizations grew by 12.8% to Rs 4027/ton. The wind power vertical registered 24.7% yoy decline in revenues to Rs 40 million consequently registering a loss of Rs 75 million."

"During the quarter, MCL entered into contract to source its international coal/pet coke requirement at USD 40-50. This is substantially lower than our estimate for FY10. With MCL importing 70% of its coal requirements, we expect significant savings on the coal cost front. We maintain our earnings estimate for MCL at Rs 18.8/ share for FY10E and are introducing FY11E estimate at Rs 18.9/share. We are increasing our valuation multiple for MCL from 5x to 6x mainly on account of lowering of discount as compared to Shree Cement and better earnings outlook on account of significant cost benefits. We are revising our price target upwards to Rs 111 and maintain our 'HOLD' rating on the stock," says Emkay Global Financial Services' research report.