The Hindu Business Line : Madras Cements: Book profits partially

SHAREHOLDERS of Madras Cements can contemplate profit booking on a part of their holdings. The company is well-placed to turn in steady growth in revenues and earnings by ramping up volumes in a gradual manner; but it would have to contend with pricing pressures and the likelihood of enhanced supply. Over the next year, despite the high operating efficiency and contemporary nature of its capacities, a sharp rise in input costs and limited flexibility in raising cement prices may hamper profitability and earnings growth. Madras Cements continues to be one of the superior plays in the cement industry from a long-term perspective; in the near-to-medium term, regional demand-supply dynamics may, however, lead to its stock under-performing peers with a focus on other markets.

The southern market — Andhra, Tamil Nadu and Kerala — catered to by Madras Cements continues to be dogged by excess capacity. With Dalmia Cements planning to add to its capacities, the demand-supply balance is likely to be affected. Producer pricing power is bound to be weak over the next few years unless there is consistent supply-side discipline to tailor output levels to demand. This would mean companies operating their capacities at sub-optimal levels. If India Cements ropes in a strategic partner of strength from the ranks of MNC aspirants, it could also alter the industry dynamics in the southern market.

That Madras Cements has managed to improve its volumes by about 5 per cent over the past year is encouraging . The company has a window of opportunity over the next year or so to improve its volumes in the Tamil Nadu and Kerala market without the pressures of enhanced competition. Once Dalmia Cements' planned capacity of 1.6-million tonnes goes onstream, the position could change as an aggressive battle to ramp up volumes in the new units could have negative implications on prices.

For FY 04, Madras Cements' earnings has more than doubled aided by higher cement price levels over the last two quarters of the fiscal. A perk in demand levels would, however, be necessary to place the higher cement prices on a stable footing. Else, the possibility of them receding to lower levels and affecting profitability levels appears likely.

With capacity of about 5.5- million tonnes, Madras Cements is likely to be a strong player with a regional focus over the long term. By opting to grow through greenfield units, it has ensured that its capacities would deliver high operating efficiencies for several years.

When the demand-supply balance improves over a three-year period, Madras Cements would be well-placed to capitalise on the opportunities.

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