Buy Madras Cement - Microsec

We rate Madras Cement Limited a BUY. Madras Cements Ltd, a flagship company of the Ramco group is a major cement manufacturer in South India. It is the third largest cement producer in South India after ACC and India Cements. The main product of the company is Portland cement, manufactured in five state-of-the art production facilities spread over South India, with a total production capacity of 12.49 MTPA of cement and a captive power capacity of 112 MW. Plant locations are in Tamil Naidu, Andhra Pradesh, Karnataka and West Bengal.

Strong Growth delivered in FY12 & Encouraging Return Ratios. The company has registered a strong financial growth in FY12. It's Net sales increased by 24% to INR3278 crore and PAT improved by 82% to INR386 crore. Its EBITDA margin also improved from 24.6% to 29.3%. ROE of the company came at 20.4%. Its total D/E ratio also came down marginally from 1.1 to 1.0. Madras cement's financial ratios are strong and are very much in line with top cement players like Ultratech Cement, ACC and Ambuja Cement.

Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA to add to Topline once the demand improves: Madras Cements has completed the capacity expansion of its cement plant of 2MTPA (million Tonnes Per Annum) capacity at its Ariyalur plant in Tamil Nadu to increase the total capacity from 10.49 MTPA to 12.49 MTPA. This capacity expansion will help in increasing its topline and meeting the demand which is expected to improve after the monsoon departure and government's thrust on infrastructure revival. Also the company is expected to add another 45MW of captive power taking its total captive power capacity to 157 MW which will further reduce its power cost.

Pick up in Cement prices by INR25-30 per bag after the monsoon season: Cement prices in the Andhra Pradesh market have started to pick up after the correction witnessed in the earlier 3 months time. Prices of cement have gone up by INR25-30 per bag of 50 kg in AP in October after hovering around a level of INR230-240 per bag. Cement companies, which have been going through a bad patch, see not just a recovery of prices, but growth with demand increasing, as the monsoon season is just over and construction movement is showing signs of improvement.

Valuation

At the CMP of INR186, the stock discounts its FY13E EPS of INR17.4 by 10.7x and its FY14E of INR21.7 by 8.6x. Madras cement is attractively priced at the current level considering its higher EBITDA margin, Sound ROE and completion of Capacity Expansion. In FY12, although Southern Region witnessed a decline of 1% but Madras Cement has delivered a growth of 4% which further justifies the strength of the company. We assign a P/E multiple of 10.5x on its FY14E EPS to arrive at the target price of INR228 for the stock.

Source : Equity Bulls

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