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Demand trends have been strong in the South.

Rajalakshmi Sivam

The Madras Cements stock may be a good addition to the portfolio for investors with a medium-term perspective. Strong sales growth, favourable demand scenario in the southern region and high operational efficiency are Madras Cements’ key positives. Cement prices in the region also continue to be firm despite regulatory intervention. A total wind power capacity of 150 MW by early FY-09 may also help the company save on fuel cost.

The stock trades at 10 times its trailing 12 months earnings per share of Rs 334. The southern region is one of the pockets where strong cement demand has been sustained in recent months. Cement prices in the south have accordingly remained firm in the Rs 240-250 per bag range.

Madras Cements appears well-positioned to benefit from the strong demand, with its new additional capacities and captive power project.

Madras Cements, a Ramco group company, is the second largest player in the southern cement industry with an installed capacity of 8 million tonnes per annum. The company has plants in Tamil Nadu, Andhra Pradesh and Karnataka. The company’s “Ramco super steel cement” and “Ramco super grade cement” are well recognised in the South. Madras Cements also relies on wind power generation for captive use, with the current capacity of windmills at 64 MW.

The company has announced the addition of two million tonnes to its existing capacity by September end, through a greenfield expansion at Ariyalur, Tamil Nadu.

A two-million-tonne clinker facility was added in Andhra Pradesh in January, which increased the installed capacity of the company from six million to the current eight million tonnes per annum. Additions are expected to take wind power capacity to 150 MW this fiscal year. These expansion plans have been funded through internal accruals and debt, contracted at about 9 per cent, on an average.

The capacity additions appear well-timed; supplies in the region are tight and the company’s utilisation rates are close to 100 per cent. As no major capacity additions are coming up till September this year, firm trends in prices may persist till then. Assuming sustained demand growth at 10 per cent, capacity additions announced so far could result in surplus of 18 million tonnes in the region by end FY-09.

However, constraints in green-field expansion projects due to delays in land acquisition, non-availability of critical equipment, and so on, may provide further cushion to players.

With cement prices under a tighter leash, cost-cutting may be the need of the hour for cement producers. Power and fuel costs, a significant cost component, have shot up in recent times on account of higher dependence on imported coal and international prices of around $130 per tonne.

Madras Cements’ plan to augment its wind power capacity may bring with it significant cost savings. Once new capacity is commissioned, power requirements of nearly 3.5 million tonnes of cement would be sourced from wind power.

In the nine months between April and December 2007, the company managed a 30 per cent increase in gross sales to Rs 1,482 crore. Operating profit margins also saw a 250-percentage point expansion from 37.6 per cent to 40.1 per cent, helping a 40 per cent growth in net profit to Rs 332.06 crore.

At a time when growth for cement companies may come mainly through volume growth and capacity additions, Madras Cements’ healthy cash flows from operations (Rs 308.38 crore for FY-07), a moderate debt equity ratio (0.8) and a high return on net worth in comparison to peers, position it well to fund its expansion plans. The company recently commenced an open market buyback programme, which has shrunk its equity base by 1.4 per cent.

The risk of cooling cement prices on account of early commissioning of the new capacities planned in the Southern region exists. Regulatory measures by the government to curtail cement prices may also hurt earnings growth.

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