The Hindu Business Line : Madras Cements: Book profits and re-enter at lower levels

SHAREHOLDERS of Madras Cements can consider paring exposures now and contemplate re-entring at lower levels. The company has reported one more quarter of disappointing earnings and growth. The pressures on cement prices and sluggish volumes have led to a considerable scaling down of revenues and earnings in the July-September quarter. The only silver-lining has been the improvement in the operating profit margins and the lower interest costs. But for these aspects, the decline in earnings would gave been even more pronounced.

The key cement markets in the South continue to be dogged by over-capacity.The situation is likely to remain this way for sometime. This is well-reflected in the numbers of Madras Cements, which has reported a sharp drop in earnings for two consecutive quarters. Sales (at Rs 158.2 crore) in the July-September quarter are down 14.7 per cent and for the April-September 2002 period by 18.9 per cent.

The company which, even when the industry was in difficult times, managed to maintain its operating profit margins at around 25 per cent, has found the going difficult now. The operating profit margins have dipped below the 20 per cent mark, though at 19.4 per cent, they are up 1.7 percentage points year on year.

Even compared to April-June 2002 quarter, the margins are down seven percentage points. This indicates the extent to which conditions have become more difficult for cement companies in this region in the last few months. At the present level of profitability, Madras Cements would be hard-pressed to repeat its 2001-02 earnings of Rs 26.86 crore.

Coupled with lower interest costs and a higher `other income' component, Madras Cements closed the September quarter with earnings before tax of Rs 1.09 crore, down 27 per cent from Rs 1.49 crore in the previous period. With the effective tax rate at around 8 per cent of profits, the post-tax earnings may be lower at the end of the year.

For Madras Cements, the key now is to go through this phase of poor prices and cement volume levels without slipping into the red. Much will depend on the performance in the January-March quarter if there is to be an improvement in the profitability levels. This quarter was not a good one in 2002 and the current pointers suggest that the picture may not be much different in 2003.

For the April-September six months, the sales were Rs 319.9 crore (Rs 394.6 crore), operating profits Rs 72.9 crore (Rs 102.1 crore) and earnings before tax Rs 9.7 crore (Rs 31.7 crore).

Outlook: The Madras Cements stock now trades at price earnings multiple of 27 times the annualised 2002-03 earnings. The stock does not enjoy high trading volumes. But what has helped it remain in the Rs 3,800-4,100 range is the purchases by the promoter group; promoter shareholding is up by 4.8 percentage points in the last 12 months.

But with its expansion plans providing the company higher scale of operations and with higher operating efficiencies, the profitability levels may bounce back sharply when realisations look up. This may take time since there are also sales tax fetters in Tamil Nadu on prices moving up. With no equity expansion accompanying the enhanced capacity, shareholders are likely to benefit when the price equation improves.

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