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We recommend ADD on Madras Cements (MCL), as the stock
has corrected sharply and is available at a large discount to
replacement cost. MCL’s 5,000tpd clinker capacity recently
commenced operations; hence, we expect the company’s
cement volumes to increase from FY13 vs. a decline in FY11.
Power costs are likely to decline after the 45MW captive power
plant commences operations in 2HFY12. MCL, a south-focused
player, has benefited from strong pricing discipline in the
southern region over the past two quarters; we expect
margins to be volatile, owing to low utilisation among
companies in the southern region and likely re-emergence of
fight for market share when new producers begin production.
MCL is trading at a reasonable FY13ii EV/Ebitda of 5.9x and
EV/tonne of US$66.
Volume growth likely from FY13: MCL’s second clinker capacity
(of 5,000tpd) in Ariyalur, Tamil Nadu, commenced operations
recently. Its cement volume declined in FY11, owing to poor demand
and competitive pressure in the southern region. We expect cement
volume to increase from FY13, as the company would focus on
volume growth with new capacity commencing production.
Captive power plant of 45MW to reduce power costs: Tamil
Nadu has been facing severe power cuts in the past few years. This
has forced cement producers like MCL to operate on diesel generator
(DG) sets, which has led to a sharp increase in costs. MCL’s 45MW
captive power plant would begin operations in 2HFY12, which should
reduce power costs substantially from FY13. MCL will have a 100%
captive power facility post commencement of this plant.
Margins to remain volatile: Strong pricing discipline in the
southern region has boosted MCL’s margins. The southern players’
margins hinge on sustainability of pricing discipline; we expect
margins to be volatile, owing to possibility of low utilisation over the
next three years and entry of new players in the southern region.
However, margin volatility is likely to be lower for MCL vis-à-vis the
industry, owing to stable profitability from the wind power segment,
which contributed to 12% of total Ebit in FY11.
MCL available at sharp discount to replacement cost; ADD: We
expect MCL’s profitability to be volatile, owing to low utilisation in the
southern region and likely re-emergence of fight for market share
when new producers commence production. MCL’s profitability
hinges on price and volume discipline continuing in the south region.
We value the stock at one-year forward rolling EV/Ebitda of 5x. Our
revised target price offers 26% upside from the current level.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend ADD on Madras Cements (MCL), as the stock
has corrected sharply and is available at a large discount to
replacement cost. MCL’s 5,000tpd clinker capacity recently
commenced operations; hence, we expect the company’s
cement volumes to increase from FY13 vs. a decline in FY11.
Power costs are likely to decline after the 45MW captive power
plant commences operations in 2HFY12. MCL, a south-focused
player, has benefited from strong pricing discipline in the
southern region over the past two quarters; we expect
margins to be volatile, owing to low utilisation among
companies in the southern region and likely re-emergence of
fight for market share when new producers begin production.
MCL is trading at a reasonable FY13ii EV/Ebitda of 5.9x and
EV/tonne of US$66.
Volume growth likely from FY13: MCL’s second clinker capacity
(of 5,000tpd) in Ariyalur, Tamil Nadu, commenced operations
recently. Its cement volume declined in FY11, owing to poor demand
and competitive pressure in the southern region. We expect cement
volume to increase from FY13, as the company would focus on
volume growth with new capacity commencing production.
Captive power plant of 45MW to reduce power costs: Tamil
Nadu has been facing severe power cuts in the past few years. This
has forced cement producers like MCL to operate on diesel generator
(DG) sets, which has led to a sharp increase in costs. MCL’s 45MW
captive power plant would begin operations in 2HFY12, which should
reduce power costs substantially from FY13. MCL will have a 100%
captive power facility post commencement of this plant.
Margins to remain volatile: Strong pricing discipline in the
southern region has boosted MCL’s margins. The southern players’
margins hinge on sustainability of pricing discipline; we expect
margins to be volatile, owing to possibility of low utilisation over the
next three years and entry of new players in the southern region.
However, margin volatility is likely to be lower for MCL vis-à-vis the
industry, owing to stable profitability from the wind power segment,
which contributed to 12% of total Ebit in FY11.
MCL available at sharp discount to replacement cost; ADD: We
expect MCL’s profitability to be volatile, owing to low utilisation in the
southern region and likely re-emergence of fight for market share
when new producers commence production. MCL’s profitability
hinges on price and volume discipline continuing in the south region.
We value the stock at one-year forward rolling EV/Ebitda of 5x. Our
revised target price offers 26% upside from the current level.
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