By Rupesh Sankhe, V Srinivasan (Angel Broking)

Performance Highlights

- Top-line boosted by higher volumes: Madras Cements posted a Top-line growth of 27.7% yoy to Rs851.4cr (Rs666.5cr) for 2QFY2010, which was below our estimates. This Top-line growth came primarily on the back of higher cement sales volumes and an increase in the average realisation for cement. The Top-line growth was also aided by a 72.3% yoy increase in the Revenues of the Windmill Division to Rs68.4cr (Rs39.7cr). Cement sales volumes grew 16.7% yoy to 2.1mn tonnes during the quarter, from 1.8mn tonnes in 2QFY2009. The average cement realisation for Madras Cements grew 4.8% yoy to Rs3,712/tonne (Rs3,543/tonne). For 1HFY2010, the company’s Top-line was up 26.4% to Rs1,621cr.

- OPM robust at 39.9%: On the Operating front, Madras Cements reported an improvement of 531bp in its Margins to 39.9% (34.6%), mainly due to higher cement sales and realisation during the quarter, and a decline in the power costs. Power costs per tonne of cement declined by 15.7% yoy to Rs726/tonne (Rs861/tonne), due to higher captive power.

- Bottom-line grows 49.6% yoy, in-line with estimates: Madras Cements posted a 49.6% yoy growth in its Net Profit to Rs169.9cr (Rs113.6cr), which is in line with our estimate of Rs162.3cr. The company’s impressive performance on the Bottom-line front came in inspite of a 53.1% increase in depreciation to Rs47.5cr, on account of capacity expansion. For 1HFY2010, the company’s Bottom-line was up 35.5% yoy to Rs308.3cr.

- Key Development: During the quarter, the company commissioned a grinding unit with a capacity of 0.72MTPA in Salem, Tamil Nadu.

Volumes and Realisations boost the Top-line

The average price realisation for Madras Cements increased 4.8% yoy to Rs3,712/tonne (Rs3,543/tonne) during the quarter. Cement sales volumes increased by 16.7% yoy to 2.1mn tones (1.8mn tonnes). The volume growth came mainly on account of the 2mtpa expansion at Ariyalur, Tamil Nadu, which was completed in March 2009.

Outlook and Valuation

We expect the Cement Sector to add around 76mtpa of capacity over FY2010-12E. Such a large capacity addition is expected to eventually create an oversupply situation in the market, as demand is not expected to catch up in the short term. Nonetheless, on a positive note, a stable government at the Centre is expected to boost infrastructure spending in the country; moreover, the ongoing recovery in Real Estate activities has considerably mitigated the concerns on the demand front. However, all-India capacity utilisation is expected to drop to 78% in FY2010, from around 85% in FY2009. Moreover, South-based players are more vulnerable than players in other regions. Over capacity and higher capacity additions, at a time when demand has turned sluggish, are likely to keep pressure on the realisations and, consequently, the profitability of the companies focusing on the southern regions.

We have increased our EPS estimates for Madras Cements by 8.3% for FY2010E, on account of better-than-expected sales volumes and realisations, and better-than expected margins, due to lower coal prices and higher captive power. Madras Cements should trade at a 35% discount to the prevailing replacement costs, as suggested by its historical valuations in a down-cycle. On the valuation front, we have valued Madras Cements at an average of a Target EV/EBITDA of 4x and an EV/tonne of US $72, to arrive at a fair value of Rs104. This is at a discount to the valuations of majors like ACC (EV of US $105/tonne) and Gujarat Ambuja (EV of US $117/tonne), after considering their return ratios, operational performance and regional focus. We maintain a Neutral view on the stock.