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We recommend to Accumulate Madras Cement Ltd (MCL) with
one year price target of `203 - 7xFY13E EV/Ebitda multiple.
INVESTMENT ARGUMENTS:
South India based player enjoying good prices & Ebitda/ton
Operational efficiency gives best EBITDA of Rs.1200/ton
Free cash flow of Rs.700crs in FY13 as large capex is behind
GROWTH DRIVERS
South India based player, enjoying handsome prices & Ebitda/
ton : Madras Cement is a pure south India based cement player with
50% of sales from Tamil Nadu, 25% from Kerela, 13% from Andhra
Pradesh and 7% from Karnataka. South India is plagued with massive
overcapacity coupled with negative demand growth. Hence logically,
cement prices should be lowest. However, cement prices in south are
highest in the country. Hence, the argument that South is weakest
region in India considering demand-supply-price dynamics falls flat.
Ebitda/ton @best in the industry due to operational efficiency:
Due to better operating efficiencies, Madras Cement emerged as the
most cost efficient player in India with the best-in-the-country Ebitda/
ton. On a 5-year basis, MCL generated an average ebitda per ton of
Rs.1190 as compared to `881 for ACC, `1000 for Ambuja Cement,
`913 for Ultratech and `880 of India Cements. Superior profitability
has been due to combination of several factors such as higher realization
in south, better operating efficiencies and Capitive Power Plants.
Healthy FCF will make Madras Cement a cash machine: MCL
will have strong Free Cash Flow generation in years to come. Installed
capacity of 13MTPA and dispatches less than 8MTPA (66% capacity
utilization) leave sufficient room for growth without additional capex.
80% of capex for another 2MTPA plant has already been expended
thus taking its total capacity to 15MTPA tons in FY14. Madras Cement
will be generating FCF in excess of `5bn in FY12 and `7bn in FY13
with potential to achieve a debt-free status over the next 3 years
Valuations & View: At the current market price, Madras Cement is
quoting at an EV/Ebitda of 5.7x on FY13e earnings. Barring crisis
year of 2009, Madras cement is available at its lowest ever EV/Ebitda
multiple over the last 10 years. Over the last 3 months, southern India
has witnessed double digit growth in dispatches thus making pure south
based players more appealing. We value Madras Cement at EV/Ebitda
multiple of 7x thus resulting in an EV of `67bn, market capitalization
of `48bn and a market price of `203/share. We believe current price
offers reasonable upside potential for investors.
CONCERNS
Further spike in raw material prices pose challenge : Cement prices on pan India
basis are at an all time high. Further, prices in southern India, which is plagued by
overcapacity, are ruling above all India average level. Though the Industry has been able
to successfully maintain production and price discipline over the last 18 months, any breakdown
in production discipline would bring down cement prices drastically due to
production surplus.
Rising Fuel and Freight rates pose additional challenges : Over the last 12 months,
Fuel and Freight rates have been rising rapidly. Any further spike in coal prices would
elevate production cost for cement manufacturers. Freight rates have been rising fast
anyways. If cement manufacturers are unable to pass on incremental cost to consumers
then profitability of this sector would come under pressure.
BACKGROUND
Madras Cements Ltd is the flagship company of the Ramco Group, a well-known business
group of South India. It is headquartered at Chennai. Its main product is Portland cement,
manufactured in five state-of-the art production facilities spread over South India, with a
current total production capacity of 13 MTPA. Capacity is slated to rise to 15 MTPA
by FY14.
Madras Cement is a pure south based cement manufacturer with majority of sales coming
from Tamil Nadu and Andhra Pradesh. MCL meets large part of its power requirement
from captive power plant (CPP). Post expansion of 45MW, the company's CPP capacity
will rise to 157MW.
FINANCIALS AND RECENT RESULTS
Revenues, EBITDA and Net Income in the quarter ended Dec 2011 grew 28%, 40% and
77% respectively y/y. Madras Cement has been able to consistently able to maintain its
EBITDA margin well above 25% mark which is commendable. Due to spurt in cement
dispatches in south during the last 3 months, we are expecting similar profit growth in
Q4FY12 as well.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend to Accumulate Madras Cement Ltd (MCL) with
one year price target of `203 - 7xFY13E EV/Ebitda multiple.
INVESTMENT ARGUMENTS:
South India based player enjoying good prices & Ebitda/ton
Operational efficiency gives best EBITDA of Rs.1200/ton
Free cash flow of Rs.700crs in FY13 as large capex is behind
GROWTH DRIVERS
South India based player, enjoying handsome prices & Ebitda/
ton : Madras Cement is a pure south India based cement player with
50% of sales from Tamil Nadu, 25% from Kerela, 13% from Andhra
Pradesh and 7% from Karnataka. South India is plagued with massive
overcapacity coupled with negative demand growth. Hence logically,
cement prices should be lowest. However, cement prices in south are
highest in the country. Hence, the argument that South is weakest
region in India considering demand-supply-price dynamics falls flat.
Ebitda/ton @best in the industry due to operational efficiency:
Due to better operating efficiencies, Madras Cement emerged as the
most cost efficient player in India with the best-in-the-country Ebitda/
ton. On a 5-year basis, MCL generated an average ebitda per ton of
Rs.1190 as compared to `881 for ACC, `1000 for Ambuja Cement,
`913 for Ultratech and `880 of India Cements. Superior profitability
has been due to combination of several factors such as higher realization
in south, better operating efficiencies and Capitive Power Plants.
Healthy FCF will make Madras Cement a cash machine: MCL
will have strong Free Cash Flow generation in years to come. Installed
capacity of 13MTPA and dispatches less than 8MTPA (66% capacity
utilization) leave sufficient room for growth without additional capex.
80% of capex for another 2MTPA plant has already been expended
thus taking its total capacity to 15MTPA tons in FY14. Madras Cement
will be generating FCF in excess of `5bn in FY12 and `7bn in FY13
with potential to achieve a debt-free status over the next 3 years
Valuations & View: At the current market price, Madras Cement is
quoting at an EV/Ebitda of 5.7x on FY13e earnings. Barring crisis
year of 2009, Madras cement is available at its lowest ever EV/Ebitda
multiple over the last 10 years. Over the last 3 months, southern India
has witnessed double digit growth in dispatches thus making pure south
based players more appealing. We value Madras Cement at EV/Ebitda
multiple of 7x thus resulting in an EV of `67bn, market capitalization
of `48bn and a market price of `203/share. We believe current price
offers reasonable upside potential for investors.
CONCERNS
Further spike in raw material prices pose challenge : Cement prices on pan India
basis are at an all time high. Further, prices in southern India, which is plagued by
overcapacity, are ruling above all India average level. Though the Industry has been able
to successfully maintain production and price discipline over the last 18 months, any breakdown
in production discipline would bring down cement prices drastically due to
production surplus.
Rising Fuel and Freight rates pose additional challenges : Over the last 12 months,
Fuel and Freight rates have been rising rapidly. Any further spike in coal prices would
elevate production cost for cement manufacturers. Freight rates have been rising fast
anyways. If cement manufacturers are unable to pass on incremental cost to consumers
then profitability of this sector would come under pressure.
BACKGROUND
Madras Cements Ltd is the flagship company of the Ramco Group, a well-known business
group of South India. It is headquartered at Chennai. Its main product is Portland cement,
manufactured in five state-of-the art production facilities spread over South India, with a
current total production capacity of 13 MTPA. Capacity is slated to rise to 15 MTPA
by FY14.
Madras Cement is a pure south based cement manufacturer with majority of sales coming
from Tamil Nadu and Andhra Pradesh. MCL meets large part of its power requirement
from captive power plant (CPP). Post expansion of 45MW, the company's CPP capacity
will rise to 157MW.
FINANCIALS AND RECENT RESULTS
Revenues, EBITDA and Net Income in the quarter ended Dec 2011 grew 28%, 40% and
77% respectively y/y. Madras Cement has been able to consistently able to maintain its
EBITDA margin well above 25% mark which is commendable. Due to spurt in cement
dispatches in south during the last 3 months, we are expecting similar profit growth in
Q4FY12 as well.
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