Madras Cements – 3QFY2011; Buy; Target Rs. 139. : Angel Broking

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Madras Cements – 3QFY2011 Result Update

Angel Broking maintains a Buy on Madras Cements with a Target Price of Rs. 139.

For 3QFY2011, Madras Cements (MAC) posted robust performance, with net

profit surging 171.8% yoy and 39.8% qoq to `43cr aided by the production

discipline undertaken by the cement manufacturers in the southern region.

However, dispatches at ~1.45mn tonnes declined by 20% yoy due to low

demand in the south. However, going ahead, we expect demand to pick-up in the

southern region post the cessation of the monsoons, which augurs well for the

company. We maintain a Buy on the stock.

OPM rises by 699bp to 26%: MAC’s top-line remained flat at `583cr, despite

the steep ~20% fall in cement dispatches to ~1.45mn tonnes. Realisations

improved during the quarter despite low demand on account of the pricing

discipline adopted by the cement manufacturers in the company’s key

markets in the southern region. The windmills division posted revenue of

`12.6cr, down 34.1% yoy. MAC’s operating margins moved up by 786bp yoy

to 26.0% on account of higher realisations. The windmill division posted a

marginal loss of `0.5cr. Overall, the company posted net profit of `43cr, up

172.1% yoy.

Outlook and valuation: Going ahead, we expect demand in the southern region

to pick up post the cessation of the monsoons, which augurs well for the

company. At the CMP, the stock is trading at attractive valuations of: EV/EBITDA

of 6.7x and EV/tonne of US $72 on FY2012 estimates. At these valuations, the

stock is at available at a 20% discount to its replacement cost of US $90/tonne.

We maintain a Buy on the stock, with an SOTP-based Target Price of `139.

Operational performance

Dispatches declined by ~20% yoy to `1.45mn tonnes partially due to the

prolonged monsoon season in Tamil Nadu, a key market of the company. On

the operating front, MAC’s per tonne cement realisations increased by 46.5%

yoy (32.4% qoq) to `3,908 due to the pricing discipline adopted by the players

in the south. The company’s operating profit per tonne of cement stood at

`1,051 during the quarter, up 92.6% yoy. The company registered a 12.9%

yoy decline in the raw material cost per tone, but the power and fuel costs rose

25.5% yoy to `1,025 on account of the surge in the prices of imported coal to

~US $115/tonne (US $82/tonne in 3QFY2010). The company exhausted

0.2mn tonnes of low-cost pet coke inventory build up of FY2010, resulting in

more reliance on imported coal. Freight costs increased 13% yoy to

`658/tonne due to higher dispatches to Maharashtra, Orissa and West Bengal

due to the fall in demand in the south. Overall, the company reported net

profit per tonne of `300.

Cement demand scenario in 3QFY2011

During 3QFY2011, all-India demand grew by a tepid 2% yoy. The southern region

fared poorly with de-growth of 2.2%. The major cement consuming state of

Andhra Pradesh posted 15% de-growth in demand on a yoy basis as against the

high 24% growth witnessed in FY2010. Kerala also witnessed de-growth of 2% in

cement demand during the quarter. Tamil Nadu and Karnataka however recorded

positive growth in demand during the quarter.

Investment arguments

Major player in South with limited presence in Andhra Pradesh: MAC is a

major cement player in the southern region, with total cement capacity of

10.5mtpa. The company’s dispatches increased at 12% CAGR during

FY2007-10, aided by the 4.5mtpa increase in capacity over the same period.

Currently, MAC is also facing clinker shortage owing to which it is setting up a

second clinkerisation unit with capacity of 2mtpa at its Ariyalur plant. The total

project cost is estimated to be `600cr. Post this expansion, MAC’s cement

capacity would expand to 12.5mtpa by the end of FY2011. Thus, the

company’s overall capacity is set to more than double over FY2007-12E.

MAC derives nearly 50% of its cement revenues from Tamil Nadu and only

19% from Andhra Pradesh, the worst affected region in terms of demand

slowdown. Thus, the company is better placed than the other players that have

higher exposure to Andhra Pradesh.

Installation of new captive power capacities to improve margins: MAC has been

augmenting its windmill capacity to reduce dependence on the state grid for its

power requirement. The company’s windmill capacity currently stands at 163MW,

which is sufficient to handle close to 61% of its total power requirements. Going

ahead, MAC plans to invest `310cr to set up an 85MW captive thermal power

plant, including a 60MW unit at Ariyalur and a 25MW plant at RR Nagar, Tamil

Nadu.

Outlook and Valuation

Going ahead, we expect demand in the southern region to pick up post the

cessation of the monsoons, which augurs well for the company. At the CMP, the

stock is trading at attractive valuations of: EV/EBITDA of 6.7x and EV/tonne of US

$72 on FY2012 estimates. At these valuations, the stock is at available at a 20%

discount to its replacement cost of US $90/tonne. We maintain a Buy on the stock,

with an SOTP-based Target Price of `139.