Mark to Market | Why Madras Cements did better than India Cements

While ICL reported 2% growth in sales despatches, MCL posted 12% growth, along with better realizations
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First Published: Mon, Nov 05 2012. 07 39 PM IST
The divergence in profitability was not reflected in the stock price. Both stocks dipped marginally after the results were announced, in a rather lacklustre trading session on Monday. Photo: Mint
The divergence in profitability was not reflected in the stock price. Both stocks dipped marginally after the results were announced, in a rather lacklustre trading session on Monday. Photo: Mint
Updated: Mon, Nov 05 2012. 11 25 PM IST
During the September quarter, southern cement makers Madras Cement Ltd (MCL) and India Cements Ltd (ICL) were hit by a surge in power, fuel and freight costs. But, varied performance on sales despatches and realizations resulted in a divergence in profitability.
MCL’s net sales beat Bloomberg’s consensus estimates—at Rs.999.50 crore, it was higher than a year before by around 22%. ICL’s sales growth was subdued at around 3% to Rs.1,122.70 crore during the period. One reason was the poor 2% growth in sales despatches by ICL, compared with the around 12% by MCL, along with better realizations. This is possibly because ICL has a bigger proportion of its revenue accruing from the state of Andhra Pradesh (AP), where the problem of poor cement offtake was aggravated by falling prices in July and August. According to Mihir Jhaveri, vice-president-institutional research, Religare Capital Markets Ltd, “prices in AP are back to Rs.250-260 per bag, after falling to Rs.210, even as the rest of the southern markets remained relatively stable”.
Meanwhile, costs have only vaulted over the last six months. In a media release, the ICL management said variable costs shot up due to reliance on high cost of power at AP plants and a power holiday of 12 days per month. The increase in power tariff in AP and Tamil Nadu by the state electricity boards has also hurt.
ICL’s operating margin plunged by a significant 480 basis points (bps), or 4.8 percentage points, from a year ago, to about 18.3%. However, on account of better realization growth and a relatively lower reliance on the AP market, MCL’s margin fell by a lower magnitude of 117 bps to around 31.4%, which displays better operating efficiency. One basis point is one-hundredth of a percentage point.
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According to a report by Emkay Global Financial Services Ltd, “MCL’s outperformance is driven by higher realization and operating efficiency.”
Obviously, this trickled down to the net profit. MCL’s net profit jumped 20% from the year-ago period to Rs.132.9 crore, whereas ICL’s net profit, at Rs.63.9 crore, was 8.3% lower from the year-ago period, after adjusting for forex losses.
The divergence in profitability was, however, not reflected in the stock price. Both stocks dipped marginally after the results were announced, in a rather lacklustre trading session on Monday.
That said, cement prices are currently stable in most southern markets, though the next three months are typically dull due to monsoon. Further, gross domestic product (GDP) growth estimates for the current fiscal have been watered down to around 5% from the earlier projections of 7.5%. This is likely to be mirrored in lower cement demand, which could also hit pricing power and restrict upsides for cement stocks.
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First Published: Mon, Nov 05 2012. 07 39 PM IST
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