Stock Market Result Update on Madras Cements for 2QFY2012

Stock Market Result Update on Madras Cements for 2QFY2012 with an Neutral recommendation. 

For 2QFY2012, Madras Cements (MAC) posted a robust performance, with net profit surging by 256.3% yoy to `111cr, which was in-line with our estimates. Strong bottom-line performance was on account of whopping 47.3% yoy growth in realization on a low base. (Realization of MAC, a predominantly south-based player had earlier suffered due to collapse in cement prices in south during 2QFY2011). However, dispatches fell by 9.3% yoy to 1.77mn tonnes due to continuing poor demand situation in the south. We remain Neutral on the stock.

OPM at robust 33.4%, driven by 47.3% yoy improvement in realization: MAC registered 27.6% yoy top-line growth to `819cr, driven by 33.7% yoy growth in the cement division’s revenue. However, revenue of the windmill division fell by 25.3% yoy due to lower operational capacity (MAC had sold 26.4MW during September 2010 and, thus, had higher operational capacity during the first two months of 2HFY2011). Firm production discipline in the south during 2QFY2012 led to the phenomenal 47.3% yoy growth in cement realization. In fact, MAC’s realization was higher by 3.4% even on a qoq basis (vs. the qoq decline in realization reported by pan-India players such as ACC and UltraTech Cements), as cement prices declined sequentially in other regions during the quarter. A steep improvement in realization resulted in a 1,550bp yoy increase in OPM to 33.4% despite hike in raw-material, power and fuel and freight costs.

Outlook and valuation: Going ahead, cement prices in the southern region are expected to correct from current levels due to commissioning of new capacities. We expect MAC to post a 15.4% and 29.7% CAGR in its top line and bottom line over FY2011-13E. At the CMP, the stock is trading at EV/EBITDA of 5.3x and EV/tonne of US$85 on FY2013 estimates.  We remain Neutral on the stock.