>MADRAS CEMENTS

Recommendation: Hold
Price target: Rs190
Current market price: Rs173

Price target revised to Rs190

Result highlights

• Healthy performance; PAT grew by 25.1% YoY: In Q1FY2013 Madras Cements delivered a healthy performance with a net profit of Rs123 crore (a growth of 25.1% over the previous year). The net profit is marginally lower than our estimate. The quarter's performance was driven by a healthy growth in the volume and the average realisation. The company also benefited in terms of higher than expected profitability in its windmill division (which posted EBIT of 60.6% as compared with 47% in Q1FY2012). However, the interest and depreciation charges were higher than our estimates. 
  
  
• Strong volume growth and healthy realisation drive revenue growth: The overall revenue of the company increased by 29.5% year on year (YoY) to Rs989.3 crore, which included the revenues of Rs41 crore from the windmill division. The revenue growth was driven by a strong cement volume growth of 21.3% YoY (on account of the stabilisation of its new capacity and a partial revival in demand in the southern region excluding Andhra Pradesh). Further, the average cement realisation increased by 6.8% YoY to Rs4,494 per tonne. The demand environment in the southern region has partially recovered particularly in Tamil Nadu, Karnataka and Kerala. In terms of realisation, we believe the average realisation for FY2013 will remain higher compared with the average realisation of FY2012. 
  
  
• Margin contraction due to increase in cost of production: In spite of a 6.8% increase in the average cement realisation YoY and expansion in the EBIT margin of the windmill division (60.6% in Q1FY2013 vs 47% a year ago), the overall operating profit margin (OPM) contracted by 97 basis points YoY to 31% (but was ahead of our estimate). The year-on-year (Y-o-Y) contraction in the OPM was on account of an increase in the cost of production. During the quarter the freight cost increased by 35.3% on a per tonne basis and the other expenses increased by 30.4% to Rs104.2 crore. Hence, the overall cost of production increased by 8.3% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 3.2% YoY to Rs1,260. 
  
  
• Addition of cement capacity of 2mtpa and power plant of 45MW come on stream: During the quarter, the company commenced 2 million tonne per tonne (mtpa) of grinding capacity at Ariyalur. With this the overall cement capacity of the company enhanced to 12.5mtpa. In addition, the company commissioned total captive power capacity of 45MW (20MW in Ariyalur and 25MW in RR Nagar). The capacity addition in the cement business will support the volume growth of the company in FY2013 and the commissioning of the captive power plants (CPPs) will reduce the company's dependence on grid and improve its efficiency.
  
  
• Downgrading earnings estimates for FY2013 and FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly on account of a lower than expected cement realisation and higher than expected interest and depreciation charges. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 now stand at Rs14.9 and Rs16.6 respectively. 
  
  
• Maintain Hold with a revised price target of Rs190: Going ahead, we expect the cement offtake in the southern region to improve gradually. Hence, we expect the company to post a volume growth of close to 6% in FY2013 as compared with the flat volume growth posted in FY2012. However, a likely increase in the supply in the southern region is a key risk to the cement price. Further, cost pressure in terms of a higher freight cost is expected to pressurise the margin. We, therefore, maintain our Hold recommendation on the stock with a revised price target of Rs190 (valued at EV/EBITDA of 6.5x on FY2014 estimate) as we roll forward our valuation to FY2014. However, in the longer run we believe Madras Cements has the potential to deliver good returns to its investors due to its operational efficiency. At the current market price the stock trades at a PE of 10.5x and an EV/EBITDA of 6x its FY2014 earnings estimate. 

RISH TRADER