>MADRAS CEMENT (EMKAY)

Madras Cement Q4FY2009 results are sharply below our expectations primarily on account of lower than estimated topline growth, higher raw material costs and losses in the windmill division. Cement revenues increased by 20.4% yoy to Rs6.38bn driven by 6.8% volume growth while realizations grew by 12.8% to Rs4027/ton. The wind power vertical registered 24.7% yoy decline in revenues to Rs40mn consequently registering a loss of Rs75mn. Overall EBIDTA declined by 1.7%yoy to Rs1.69bn mainly on account of 54% increase in raw material cost to Rs743/ton. Net profit declined by 12.3% yoy to Rs736mn (our estimate Rs953mn). During the quarter, MCL entered into contract to source its international coal/pet coke requirement at USD40-50. This is substantially lower than our estimate for FY10. With MCL importing 70% of its coal requirements, we expect significant savings on the coal cost front. We maintain our earnings estimate for MCL at Rs18.8/ share for FY10E and are introducing FY11E estimate at Rs18.9/share. We are increasing our valuation multiple for MCL from 5x to 6x mainly on account of lowering of discount as compared to Shree Cement and better earnings outlook on account of significant cost benefits. We are revising our price target upwards to Rs111 and maintain our HOLD rating on the stock. At the CMP of Rs108, the stock is trading at 5.7x FY10E earnings and USD69.6FY10E capacity.

Result Highlights
■ MCL’s revenues increased by 21.1% yoy to Rs6.42bn. Cement revenues increased by 20.4% yoy to Rs6.38bn driven by 6.8% volume growth while realizations grew by 12.8% to Rs4027/ton. The wind power vertical registered 24.7% yoy decline in revenues to Rs40mn consequently registering a loss of Rs75mn.

■ Overall EBITDA declined by 1.7% yoy to Rs1.69bn mainly on account of a 54% yoy increase in raw material cost to Rs743/ton. P&F and Freight expenses were up 14.7% and 13.3%yoy to Rs943/ton and Rs645/ton. However on a sequential basis, the same were down 17% and 4% respectively reflecting fall in prices in international coal and crude oil prices. EBITDA margin for the quarter declined by 613bps to 26.4% which was substantially lower than our estimate of 31.3%.

■ The cement division registered 2.2% decline in profitability with EBITDA of Rs1.61 bn as the division registered 585bps decline in its EBITDA margin to 25.3%. Cement EBITDA was mainly affected by a 46.6% yoy increase in raw material costs to Rs675/ton. Consequently EBITDA/ton for the cement vertical showed a decline of 10% yoy to Rs1043. However the same was up on a sequential basis by 4% as key operating costs P&F and freight were down by 17% qoq and 4% qoq respectively.

■ Windmill division on the back of 24.7% decline in revenue slipped into EBIT loss of Rs75 mn.

■ Interest expense for the quarter increased by 8.8% to Rs299mn while depreciation charge was up 84.5% on account of capacity addition during the year.

■ Consequently net profit for the quarter at Rs736mn which was sharply below our estimates of Rs953 mn.

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