Madras cement Q3FY12 earnings review

Madras Cement, a part of the Ramco Group, announced its results on February 3, 2012 for the quarter ended December 2011. The company has reported decent growth in topline and bottomline on a YoY basis. The net sales of the company grew by 27 per cent on a YoY basis to Rs 744 crore. The net profit has grown by a strong 76 per cent on a YoY basis to Rs 76.84 crore. This was despite the subdued demand from the southern region. The company has done well on the margin front too. The EBITDA margin of the company has improved by 220 bps to 28.28 per cent and the profit margins have improved by 280 bps to 10.3 per cent.

The strong performance of the company was on the back of better sales volume and higher realisation as compared to the same period last year. Most of the cement companies in the southern region resorted to reduce cement production in order to offset the high input costs and the lower demand during the quarter.

However, the performance of the company on a QoQ basis has remained subdued. The net sales of the company have declined by 10 per cent while the net profit has gone down by 23 per cent. The main reason behind the unimpressive QoQ result was the poor performance of its windmill business, the revenue for which has declined by 84 per cent to Rs 7.7 crore. The company has reported a net loss of Rs 6.8 crore as compared to the profit of Rs 34 crore in the previous quarter. 

We believe that the faster ramping up of capacity in the last two years has led to an over-capacity situation in the southern region. This was coupled with the slowdown in demand and the higher input costs in 2011. The situation was such that it made it difficult for the cement companies to keep their heads above water. Most of the companies during this slowdown situation did not go for a price cut, preferring instead to cut down on production which helped them to maintain the realisation. However, their volumes got impacted.

The company, despite all the headwinds, has performed well in the December quarter. And with the improving macro economic situation we believe that cement companies will do better in Q4FY12 as well. The interest rate has peaked out and the RBI has cut the CRR rate by 50 bps to improve the liquidity situation in the economy. This has also somewhat eased the liquidity situation for the infrastructure and construction companies to fund their ongoing and new projects.

The scrip in the wake of the results has shot up by 7 per cent to Rs 132.65 on the BSE within two trading session. The company at present is trading at a PE of 8.97x with annualised EPS of Rs 14.7. In our opinion, it looks to be trading at a fair valuation. With the economic situation and the demand likely to turn for the better, the company should be able to report strong Q4FY12 results. Therefore we recommend buying the stock with an upside potential of 10-15 per cent from a medium-term perspective.