Madras Cements posted a y-o-y topline growth of 24.9% to Rs768.4 crore (Rs615.0cr) for Q1FY2010, which was higher than our estimates of Rs708 crore.
This growth came primarily on the back of higher cement sales volumes and an increase in the average realisation for cement.
Cement sales volumes grew 17% y-o-y to 1.9 million tonnes during the quarter, from 1.6 million tonnes in Q1FY2009.
Average cement realisation for Madras Cements grew 6.1% y-o-y to Rs3,841/tonne (Rs3,620/tonne). Revenue of the Windmill Division increased a healthy 40% y-o-y to Rs42.3 crore (Rs30.2cr).
On the operating front, the company reported an improvement of 140bp in Margins to 37.7% (36.2%), 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 5% yoy to Rs745/tonne (Rs785/tonne) due to higher captive power. However, increases in Staff costs and Raw Material costs have restricted improvement in the margins.
Notably, Staff costs and Raw Material costs have increased y-o-y by 48.4% and 29.1%, respectively, during the quarter.
We expect the domestic cement industry to witness a substantial bunching-up of capacities over the next couple of years.
As per the announced capacity-addition plans, around 85 million tonne of cement capacity is expected to come on-stream, going ahead.
However, assuming a 20% slippage due to delays in equipment procurement, land acquisitions and/or fund raising plans, such huge capacity addition (70mn tonnes) is bound to create an oversupply situation and to exert pressure on the cement prices.
At Rs112, Madras Cements is trading at an EV/EBIDTA of 4.5x and 4.3x FY2010E and FY2011E EBIDTA, and an EV/tonne of $84/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% discount to the prevailing replacement costs, as suggested by its historical valuations in a down cycle.
We maintain a REDUCE recommendation on the stock, with a target price of Rs94.