Accumulate Madras Cements; target Rs 245: Emkay

Emkay Global Financial Services is bullish on Madras Cements (MCL) and has recommended accumulate rating on the stock with a target price of Rs 245 in its November 5, 2012 research report.

"Madras Cements (MCL) delivered yet another solid quarterly performance as Q2FY13 EBITDA at Rs3.14bn(+18% yoy) came in 20% higher than our & street estimates. The surprise was entirely driven by higher than estimated cement realizations which at Rs4632/t (Estimate of Rs4420) improved +10.8% yoy & 5.4% qoq. EBITDA/t at Rs1298 (+8% yoy, +5.4% qoq) came in above estimates of Rs1074/t driven by higher realisation. Revenues grew 22% yoy, driven by a solid 11% volume growth as MCL benefited by healthy offtake in key states like Tamilnadu (TN), Kerala, West Bengal & Orissa. Higher proportion of sales in Kerala, WB & Orissa markets where prices remained firm also cushioned MCL from sharp decline in Andhra. Though interest expenses and depreciation charge increased ~20% yoy on account of capitalization of 45 MW captive power plants at TN plants (Ariyalur and RR Nagar), robust EBIDTA growth helped net profit growth of 20% yoy to Rs 1.33bn, significantly above our estimates of Rs 0.92bn.

Despite increased in grid electricity tariffs in TN and power cuts in Andhra, MCL’s low cost petcoke inventory procured earlier in the year, and commissioning of 45 MW captive power plants at TN plants (Ariyalur and RR Nagar) helped MCL contain its energy cost substantially (P&F cost at Rs1001/t -0.3% yoy & +1.5% qoq). Though the 23% rail freight hike and the recent increase in diesel prices led to freight cost increasing by 22% yoy (Rs 842/t), better logistic management led to a 5.4% sequential decline. Though we expect the recent road freight hike to get fully reflected in H2FY13, the company is looking at freight rationalization that could help reduce the impact of the same.

MCL has locked its petcoke requirement for 5-6 months at lower price prevailing in 4QFY12. Further the recent decline in international coal prices should help MCL further improve its cost structure as imported petcoke/coal accounts for 75% of it’s requirement. Further the with ramp up of 25 MW captive power plant (CPP) at RR Nagar (TN) and 20 MW CPP at Ariyalur (TN), MCL will be able to de-link itself from expensive grid power in TN (per Unit Tariff of Rs5.5-6/unit) and save at least 15% on per unit basis.

Due to low capacity utilization and high debt, MCL’s RoCE at 13.8% was ~500bps lower than its larger peers like ACC, Ambuja and Ultratech. With MCL’s robust volume growth, low energy cost inflation and accelerated debt repayment, we expect MCL’s RoCE to improve to 15.7% by FY14E and 18% in FY15E. This we believe would drive further rerating helping continued stock out performance despite recent rally (+18% in 3M), as current valuations at FY14E 5.7X EV/EBIDTA & EV/T of USD 100, remain attractive and leaves enough upside. Maintain Accumulate with a target price of Rs 245," says Emkay Global Financial Services research report.

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