Madras Cements Ltd has beaten Street expectations for the June quarter, but all is not well for the firm, not unlike the whole cement industry.
Sure, net profit grew by 35.4% from a year ago. That was on the back of a 27% increase in operating profit and a rise of 4.4 percentage points in margins, but these gains were due to cost savings, which may not be sustainable.
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The big problem for the firm is the decrease in volumes by 5.3% over a year ago. This is the second straight quarter of shrinking volumes for the firm and the prospects, too, appear muted. Just like the rest of the industry, high interest costs and slowing of construction activity will beat down demand. Madras Cements’ key market of Tamil Nadu will face the brunt of the retreating monsoon later this year, which will add additional pressure on volume growth.
What saved the firm was the 15.7% increase in per tonne realization. That may not last either. Prices are falling due to sluggish demand, and at best may remain stable in the coming quarters, brokerages say.
Remember that capacity, too, is increasing across the country; Madras Cements itself will commission a new two million tonnes per annum factory this month, and that will also put pressure on prices.
Secondly, the company was able to save 7% on raw material costs and 6.3% on power and fuel costs compared with a year ago. That capped the total expenditure increase at 3%. Sure, they have a captive power plant that helps, but with the whole country scrambling for coal and with prices increasing for this key input, it is doubtful whether these savings are sustainable.
Therefore, it is not surprising that the stock has underperformed the broader market so far this fiscal year. Unless demand improves dramatically, that situation is likely to continue.
Graphics by: Yogesh Kumar/Mint
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