Hold Madras Cements; target of Rs 195: Emkay

Emkay Global Financial Services has recommended hold rating on Madras Cements (MCL) with a target of Rs 195 in its August 2, 2012 research report.

“Madras Cement delivered a solid 1QFY13 operational performance with EBITDA at Rs3.07bn +25.5% yoy ahead of our (Rs2.94bn) and street estimates (Rs2.758bn). The quality of performance was far superior to its peers as the EBIDTA gains were driven by a extremely healthy volume growth of 21.2% yoy (2.11mnt) while realisation improved just 7% (Rs4491/t) as compared to peer which saw single digit volume growth (4-6%) and 11-13% improvement in realisation. Volumes grew as MCL benefited from sanguine demand scenario in Kerala, Tamilnadu (TN) & West Bengal. Further though costs at Rs3208/t (vs est of Rs3254/t) increased 8.8% yoy, the same declined 1.2% qoq helped by lower P&F costs of Rs1008/t (vs est of Rs1035/t). P&F costs/t increased just 7.6% yoy and 4.4% qoq despite a 13-19% increase in electricity tariffs by the state of Andhra & TN.”

“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 its requirement. Further the with commission 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. During the quarter MCL commissioned its 2mtpa cement line – II at Ariyalur thereby taking its cement capacity from 10.5 mtpa to 12.5 mtpa. The capitalization of Unit – II led to 22% yoy increase in depreciation charge and 14% increase in interests cost to Rs543mn (estimate of Rs350mn). Hence net profit at Rs1.23bn grew +25% yoy, slightly below our estimates of Rs1.3bn.”

“As mentioned earlier, we expect MCL cost structure to improve further driven by contracted pet coke requirement and decline in international coal prices. Commissioning of 45 MW of CPPs over H2FY13 should further help contain energy cost. Led by better than expected 1QFY13 performance we upgrade our earnings estimates for FY13E/14E by 12.4% /10%. Moreover with improvement in cement prices in MCL’s key markets as mentioned above we see further upside to our earnings estimate. We upgrade our rating on the stock to ACCUMULATE from HOLD and revise target price to Rs195 by rolling over target to FY14E numbers. Though the stock has outperformed significantly (+20% in 3M), we believe that valuations at FY14E 5.7X EV/EBIDTA & EV/T of USD 87, leaves reasonable room for further out performance,” says Emkay Global Financial Services research report.

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