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Sunday, April 12, 2009

Mid-cap cement stocks in vogue among investors

The boom in the cement industry, fuelled by the strong housing demand in small towns and rural areas, and government-funded infrastructure projects, has once again brought mid-cap cement stocks on the investor radar. The upturn has been reflected in the performance of mid-cap players.

Madras Cement, with a focus on the southern markets, reported a 10.2% growth in realisations in the December 2008 quarter. The prices moved up further by an estimated 3-4 % in the March 2009 quarter on a sequential basis. The company is expected to report a growth of 23.6%yo-y in net sales to Rs 655 crore in the March 2009 quarter on the back of an estimated 6.5% rise in dispatches. It should also show 15-16 % improvement in sales realisation in the quarter.A moderation in the cost of inputs like coal in the last quarter should also help the company to expand its net profits by nearly 60% y-o-y to Rs 121.8 crore.

The realisations of Shree Cement, which serves north India, was flat during the December 2008 quarter, but should improve sequentially by 4% in the fourth quarter. The company is expected to benefit from the 20% jump in cement dispatches in the last quarter. We expect its net sales to grow by nearly 30% yo-y to Rs 843 crore during the period. Towards the end of the fourth quarter of FY 09, Shree Cement commissioned clinker capacity amounting to an additional one million tonnes.As a result, its net profit is expected to more than double to Rs 163 crore in the March 2009 quarter. Mid-cap stocks have broadly outperformed the market in the past three months. Madras Cement is up 13.4% compared to the Sensex’s rise of 12.7%. The ET Cement Index is also up by 16.3% during this period. Shree Cement gained 45.7% over the past three months, while JK Cement rose 14.3%. Despite the price recovery, these stocks still offer an attractive dividend yield – J K Cement offers a yield of 10.3% and Madras Cement is giving 5.2%.

Financials:Madras Cement’s operating margin fell by 1140 basis points y-o-y to 26.2% in the December 2008 quarter despite a 19% growth in net sales to Rs 611 crore. This was attributed to the higher costs of inputs such as power and fuel. JK Cement’s performance has been mediocre – net sales fell 7% y-o-y to Rs 362.1 crore in the third quarter, primarily on account of 11% y-o-y fall in cement dispatches. JK Cement is expected to post 13% top line growth in the March 2009 quarter, helped by a 9.5% y-o-y rise in dispatches and 3.4% improvement in realisations.

Growth Outlook:Madras Cement is expected to shortly commission a two million tonne plant at Ariyalur in Tamil Nadu, which will add Rs 600 – 650 crore to the top line in FY10. With the expansion, costing an estimated Rs 1082 crore, the company’s interest burden more than tripled to Rs 80.07 crore in the first nine months of FY 2009. Madras Cement’s cash balance also hit low levels in FY 2008, given the capex plans. The cement production capacity of Shree Cement is expected to cross 10 million tonnes, depending on its blending ratio. The mid-sized players are expanding even as the cement industry is likely to commission 32 million tonnes of fresh capacity in FY10. Various estimates project a 9% yo-y demand growth in the next financial year. The projected industry capacity utilisation of 86% next year, albeit lower than 94% in the past year, will still be historically high and could prevent a substantial dip in the cement prices.

Valuations:Madras Cement has a P/E of 5, at a price of Rs 76.8, and JK Cement at Rs 48.5 enjoys a P/E of 2.4, making them possible investment candidates for the long term. But Madras Cement already enjoys higher enterprise value per tonne (EV/tonne) and this could take some sheen off the stock.

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