Madras Cements: Value pick for long term

Madras Cements: Value pick for long term
Published: 21 June 2010

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 per cent as compared to a 60.2 per cent 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 10Mt at the end of March 2009, a rise of 66.8 per cent 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 1.3Mt 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 INR2920 crore during the period March 2007 and March 2009, while its operating cash flow during this period was just INR1423.5 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 government-funded 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 per cent YoY on a per tonne basis in the fourth quarter to INR2778/t.

For instance, cement capacity in the southern region was nearly 71t at the end of March 2010 a rise of 20.7 per cent from a year earlier. However, as per various estimates cement dispatches in the South grew just 7.2 per cent YoY to 64t 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 per cent levels at the end of May 2010, a decline of nearly 900 basis points YoY. In the cement industry, when capacity utilisation falls below 85 per cent, price realisations decline.

Madras Cements also had a capacity of 181.6MW in its windmill business at the end of March 2009. Also, it contributed just 4.8 per cent 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 per cent fall in its cement realisations to INR2778/t in the quarter under review.

As a result, the company’s operating profit margin declined 510 basis points to 22.1 per cent in the fourth quarter, while its net sales also fell 10.4 per cent to INR582.2 crore. Other south-based players like Chettinad Cement’s realisation fell 16 per cent YoY 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 per cent.

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