Madras Cements posted a topline growth of 20% y-o-y to Rs642 crore (Rs535cr) for 4QFY2009, which was slightly above our expectation.
The growth came primarily on the back of higher cement sales volumes and increase in average realization for cement. Cement sales volumes grew 10% y-o-y to 1.7 million tonnes during the quarter from 1.5mn tonnes in 4QFY2008.
Average cement realisation for Madras Cements grew 11% yoy to Rs3,819/tonne (Rs3,439/tonne).
Revenues of the Windmill Division however, declined 44% y-o-y to Rs4 crore (Rs7.2cr). For FY2009, the revenues increased 26% y-o-y to Rs2,530 crore (Rs2,012cr) on the back of higher cement volumes and prices.
Despite the decent growth in topline, the net profit de-grew by 3.9% y-o-y to Rs73.2 crore (Rs76.2cr) mainly on account of the erosion in margins.
Substantially higher depreciation cost, which spiked 85% due to the capacity additions of 2mtpa during the quarter, also added to the sluggish bottomline growth. For FY2009, net profit declined 11% y-o-y to Rs364 crore (Rs408cr).
Outlook and valuation
We expect the domestic cement industry to witness substantial bunching up of capacities over the next couple of years.
As per the company’s announced capacity addition plans, around 85mn tonnes of cement capacity is expected to come on-stream over the next 18-24 months.
However, assuming 20% slippage due to delays in equipment procurement, land acquisitions, fund raising plans, etc. such huge capacity addition (70mn tonnes) is bound to create an oversupply situation and exert pressure on the cement prices.
We are introducing our FY2011 numbers with an EPS estimate of Rs16. At Rs106, Madras Cements is trading at an EV/EBIDTA of 5.2x and 4.8x FY2010E and FY2011E EBIDTA and EV/tonne of US $83/tonne and $77/tonne on FY2010E and FY2011E capacities.
We believe that in view of the imminent downturn in the cement cycle, Madras Cements should trade at a 45-50% discount to the prevailing replacement costs, as suggested by its historical valuations in a down cycle.
We maintain a REDUCE rating on the stock with a target price of Rs90.