Madras Cements - Profits decline on weak realization - Karvy

Madras Cements' 1QFY14 net sales, EBITDA & PAT declined 3%, 36% and 44% YoY to Rs9.6bn, Rs2bn and Rs689mn respectively.

Sales volume grew 3% YoY & flat QoQ: Its sales volumes remained flat QoQ and rose 3% YoY to 2.21mn MT. Higher YoY growth is attributed to the ramp-up in its capacity commissioned in FY13. Its cement NSR declined 3% YoY and 1% QoQ to Rs4239 per MT (3% lower than vs our est). These resulted in 3% YoY net sales (~2% lower than estimated).

Lower realization dragged down profitability: Operating costs per MT rose 10% YoY (2% QoQ) in-line with our estimates. Higher costs were driven by fixed costs per MT which rose 20% YoY but moderated 1% QoQ. Additionally, the company consumed its high cost linkage coal inventory (vs pet coke) which resulted in higher raw materials & power/fuel costs. However, pet coke usage is expected to rise in subsequent quarters. The impact of higher fuel costs was moderated by lower logistics costs than estimated. Subsequently, lower NSR resulted in EBITDA decline 36% YoY vs our estimates of 18% decline. Higher capital charges further resulted in PAT decline of 44% YoY to Rs689mn vs our est of Rs1.06bn.

Fundamentals intact: We have lowered our NSR growth est for FY14E to 0.4% vs 3.3% earlier to factor in the current weak pricing impact on overall NSR. Subsequently, we have cut our EBITDA estimates for FY14-15E by 7%/4% respectively. We expect MCEM's profitability to benefit from ramp-up in its cement & power capacity which should drive its 7% volume CAGR in FY13-15E and also stabilize its operating costs. Higher usage of pet coke (~70% its fuel mix) would also boost its operational efficiency. With most of its capex over, MCEM's balance sheet de-leveraging drive to gain pace – leading to its net debt: equity reducing from 1.1x in FY13 to 0.6x by FY15.

Retain "BUY" with a lower TP of Rs256: We maintain our "BUY" recommendation on the stock with a TP of Rs256 (earlier Rs300 at 7.5x) valuing it at 7x its FY15E EBITDA (its long term average).

Source : Equity Bulls

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