India: power advantage for Madras Cements

India: power advantage for Madras Cements
05 July 2013


Analysts predict that Madras Cements Ltd should record 9-10 per cent volume growth through FY14 and FY15 on the back of power generation projects,  additional capacity and a gradual improvement in the cement market.

Given that power comprises a significant portion of cement production costs and given Madras Cements’ presence in the power-starved southern states of Tamil Nadu and Andhra Pradesh, the new captive power source is a huge advantage for the company over its peers.

The company has significantly added to its power generating assets in the last two years. Wind and thermal power generation now meet almost all its electricity requirements. “Increase in captive power supply and lower petcoke prices (75 per cent of its fuel mix) should boost its operating profit growth by around nine per cent between fiscal 2013 and 2015,” said a report by Karvy Stock Broking Ltd.

In its annual report, Madras Cements Ltd also announced that it plans to set up a cement grinding unit in Andhra Pradesh this year. The capital expenditure will be INR3500m (US$57.9m) over the next two years. The facility will tap fly-ash available in the area to produce cement along with clinker from its nearby unit.

With this, Madras Cements would have completed all major capex scheduled over the last two years (FY212 and FY13). It commissioned a grinding station in Tamil Nadu and also increased cement capacity through increasing plant productivity. Spending close to INR10,000m (US$165.4m), Madras Cements raised cement capacity by 3.7Mta to about 13.6Mta.

In spite of oversupply, the firm – a member of the Ramco group – has maintained 65-68 per cent capacity utilisation in 2013, on the back of the strong brand equity of Ramco Cements. More importantly, its operating margin of around 24-25 per cent amid adverse conditions such as rising freight, power and fuel costs beats the industry average and that of southern rival India Cements Ltd.

Madras Cements has got its act together through the downturn by gearing up on scale and efficiency. A gradual increase in cement demand in the south and pricing stability are likely to improve the company’s balance sheet health between FY13 and FY15.

Better sales will boost the returns on the assets created so far. The company is likely to trim debt by almost INR10,000m over the next two years from about INR26,000m, bringing the debt:equity ratio down to about 0.5 by fiscal 2015 from the present level of 1.1. “We expect the company to generate free cash flows of INR18,000m between fiscal 2013 and fiscal 2105 period,” said the Karvy report. Lower interest outgo will trickle down to boost net profit.

That said, the southern region has seen weak demand growth largely due to sluggishness in Andhra Pradesh in infrastructure and housing activity. The state accounts for almost 30 per cent of Madras Cements’s total cement sales.

With a nine per cent estimated growth rate in cement offtake and with expansions and related capital expenditure behind it, the firm is poised to cash in on the gradual recovery expected in the cement sector. The Madras Cements stock has hugely outperformed its peers over the last three years, and has also sustained profitability in spite of the slowdown.

Published under Cement News

Tagged Under: India Madras Cements