Madras Cements Ltd’s performance for the March quarter reflected oversupply in south India’s cement market, resulting in weak pricing power.
Revenue rose marginally year-on-year (y-o-y) to Rs582.1 crore but fell by 4.7% on a sequential basis. Despite higher sales volumes, sales realizations fell in the March quarter by 18% sequentially and 26% y-o-y to around Rs2,780 per tonne.
The cement maker has been hit by higher costs. Total expenses rose 13% over the year-ago period, despite flat sales growth, but fell on a sequential basis. A major contributor has been the increase in fuel costs, which soared to 29% of sales from 22% in the preceding quarter and 26% a year ago. This increase is despite higher captive power generation.
Meanwhile, freight costs at 19.6%, too, were higher both y-o-y and sequentially. Madras Cement saved on raw material costs, down to 6.2% from around 19% in the preceding quarter. Analysts attribute this reduction to stock adjustments done typically in the last quarter.
Higher expenses led to a 25% fall in operating profit y-o-y to Rs128.5 crore and operating profit margin (OPM) plummeted to 22.3% from 30.3%. OPM, however, was was higher by around 4 percentage points sequentially. Net profit fell by 59.9% y-o-y to Rs29.4 crore.
The road ahead is expected to be bumpy for Madras Cements, given that nearly two-thirds of the new capacity in the cement industry is coming up in locations in southern India in the next one year. The firm is operating at around 83% of its capacity of 10 million tonnes per annum (mtpa). Its capacity is expected to increase to 14 mtpa by fiscal 2012. Unless demand matches supply, cement prices will come under pressure. For example, dealers say that in May, prices in Tamil Nadu have already dropped to around Rs255 a tonne from Rs270 a tonne in March and April. Also, transporting cement to farther regions, which may yield better realizations, may not be feasible due to rising freight costs.
For fiscal 2010, the company’s net revenue rose by 14% rise to Rs2,813.8 crore. However, net profit fell by 2.8% to Rs353.7 crore. Shares closed lower at Rs99.5, discounting the estimated fiscal 2011 earnings about six times. While the scrip is not expensive, two dull quarters ahead and a weak outlook for cement prices may keep the price sticky at these levels.
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