1QFY2013 Result Update | Cement

August 9, 2012

Madras Cements
Performance Highlights
Quaterly results (Standalone)
Y/E Mar (` cr) Net Revenue Operating Profit OPM (%) Net Profit 1QFY13 989 307 31.0 123 4QFY12 912 200 21.9 99 % chg (qoq) 8.5 53.7 912bp 24.0 1QFY12 764 244 32.0 98 % chg (yoy) 29.5 25.5 (98)bp 25.1

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Cement 4,069 2,895 0.9 182/80 57,192 1 17,561 5,323 MSCM.BO MC@IN

`171 -

Source: Company, Angel Research

For 1QFY2013, Madras Cements (MC) posted a healthy 25.1% yoy growth in its net profit to `123cr, which was above our estimates. The company posted a highly impressive 21.3% yoy growth on the volume front indicating pick-up in cement demand in its key markets Tamil Nadu and Kerala. Realizations too were higher by 7.3% yoy (up 2.4% qoq). We remain Neutral on the stock. OPM at 31%, down 98bp yoy: For 1QFY2013 Madras Cements has posted a robust 29.5% yoy growth in its net sales to `989cr, led by higher volumes. The revenue of the cement division rose by 29.5% yoy to `948cr, while the windmill divisions revenue stood at `41cr up 27.6% on a y-o-y basis. The OPM for the quarter stood at 31%, down 98bp on a y-o-y basis. It fell despite the higher realization on account of increase in raw material, freight and power costs. The EBITDA/tonne rose by 4.6% yoy and 32.2% qoq to `1,286. During the quarter, the company commissioned its 2mtpa cement plant II at Ariyalur, resulting in interest and depreciation costs going up by 14% yoy and 21.8% yoy respectively. Outlook and valuation: Going ahead, we expect Madras Cements to post a 10.2% and 5.8% CAGR in its top-line and bottom-line respectively over FY2012-14. At the current market price, the stock is trading at a moderate valuation of US$65 EV/tonne on the current capacity (US$60 on FY2014E capacity). However, considering its unfavorable locational presence and risk of margin pressure, we continue to maintain our Neutral recommendation on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 42.3 18.0 6.7 33.1

Abs. (%) Sensex MC

3m 6.9

1yr 4.2

3yr 15.8 55.2

18.7 104.5

Key financials (Standalone)

Y/E March (` cr) Net Sales % chg Net Profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/Tonne
Source: Company, Angel Research

FY2011 2,605 (7.0) 211 (40.4) 8.9 23.7 19.3 2.3 12.8 7.8 2.6 96

FY2012 3,236 24.2 385 82.5 16.2 28.4 10.6 2.0 20.3 11.9 2.1 75

FY2013E 3,608 11.5 371 (3.6) 15.6 27.4 11.0 1.7 16.8 12.0 1.8 66

FY2014E 3,928 8.9 431 16.0 18.1 26.9 9.4 1.5 16.9 13.4 1.5 60

V Srinivasan
022-39357800 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

Madras Cements | 1QFY2013 Result Update

Exhibit 1: Quarterly performance (Standalone)

Y/E March (` cr) Net Sales Net Raw Material Costs (% of Sales) Power & Fuel (% of Sales) Staff Costs (% of Sales) Freight & Forwarding (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT (excl. Extr. Items) Provision for Taxation (% of PBT) Reported PAT PATM EPS (`)
Source: Company, Angel Research

1QFY2013 989 128 13.0 213 21.5 45 4.5 192 19.4 104 10.5 683 307 31.0 54 78 8 182 59 32.4 123 12.4 5.2

4QFY2012 912 142 15.6 206 22.6 44 4.8 186 20.4 135 14.8 712 200 21.9 31 66 31 134 35 26.1 99 10.9 4.2

% Chg qoq 8.5 (9.5) 3.5 3.0 3.5 (23.0) (4.2) 53.7 913bp 75.3 18.5 (75.3) 35.8 69.0 24.0 24.0

1QFY2012 764 118 15.4 163 21.4 42 5.4 117 15.3 80 10.5 520 244 32.0 48 64 6 138 40 29.0 98 12.9 4.1

% Chg 29.5 8.8 30.4 8.1 64.0 30 31.3 25.5 (98)bp 14.0 21.8 33.1 (74.2) 47.2 25.1 25.1

FY12 3,236 437 13.5 730 22.6 171 5.3 561 17.3 418 12.9 2,318 918 28.4 158 254 52 558 172 30.9 385 11.9 16.2

FY11 2,605 391 15.0 661 25.4 154 5.9 464 17.8 318 12.2 1,987 617 23.7 139 221 40 297 86 29.0 211 8.1 8.9

% Chg 24.2 11.8 10.5 11.2 20.9 31.5 16.6 48.7 468bp 13.8 15.0 29.6 87.6 99.7 82.4 82.4

Exhibit 2: Operational highlights

(` cr) 1,000 27.1 32.5 25.6 32.6 28.0 21.9 912 764 819 500 583 686 989 741 31 (%) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0 3QFY11 4QFY11 1QFY12 2QFY12 Net Profit 3QFY12 4QFY12 OPM (RHS) 1QFY13 Net Sales Source: Company, Angel Research 0.0

750

250

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Madras Cements | 1QFY2013 Result Update

Exhibit 3: 1QFY2013 Actual vs Angel estimates

(` cr) Net Sales Operating Profit OPM (%) Net Profit
Source: Company, Angel Research

Actual 989 307 31.0 123

Estimates 914 252 27.6 114

Variation (%) 8.2 21.6 341bp 7.8

Operational performance
For 1QFY2013 Madras Cements has posted a robust 29.5% yoy growth in its net sales to `989cr, led by higher volumes. The OPM for the quarter stood at 31%, down 98bp on a y-o-y basis. The revenue of the cement division rose by 29.5% yoy to `948cr, while the windmill divisions revenue stood at `41cr, up 27.6% on a y-o-y basis. The OPM fell despite the higher realization on account of increase in raw material, freight and power costs. Exhibit 4: Volume and realization trend
2.50 2.00 1.50 1.00 0.50 0.00 1.5 1.7 1.7 1.8 1.7 2.1 2.2 4,500 4,000 3,500 3,000 2,500 2,000

(mn tonnes)

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 Dispatches Source: Company, Angel Research Realization (RHS)

Madras Cements per tonne raw material cost rose by 3.9% yoy to `755. Freight cost per tonne during the quarter increased by 28.3% yoy to `872 on account of higher petroleum products costs and railway freight charges. Even on a q-o-q basis, freight costs per tonne were higher by 14.6%. The companys operating profit per tonne of cement stood at `912 during the quarter, flat on a y-o-y basis as improvement in realization was offset by increased expenses.

August 9, 2012

(`/tonne)

Madras Cements | 1QFY2013 Result Update

Exhibit 5: Per tonne analysis

Particulars (`) Realization/tonne Raw material cost/tonne Power & fuel cost /tonne Freight cost/tonne Other costs/tonne Operating profit/tonne 1QFY13 4,415 661 986 891 483 1,286 4QFY12 4,311 602 966 872 635 973 1QFY12 4,115 535 917 659 449 1,229 % chg (yoy) 7.3 23.5 7.5 35.2 7.5 4.6 % chg (qoq) 2.4 9.8 2.1 2.2 (24.0) 32.2

Source: Company, Angel Research; Note: Raw-material cost/tonne calculated for production volume

Exhibit 6: Segmental performance

(` cr) Revenue Cement Windmill Total (Net) EBIT Cement Windmill Total (Net) 231 25 256 233 -14.2 219 (1.0) 0.0 16.7 195 15 210 18.4 64.5 21.7 799 28 827 469 528 70.2 56.7 58 (51.5) 948 41 989 905 7 912 4.8 511.2 8.5 732.1 32.08 764 29.5 3,140 2,483 27.6 96 29.5 3,236 2,605 26.5 24.2 122 (21.3) 1QFY13 4QFY12 chg % qoq 1QFY12 chg % yoy FY12 FY11 chg %

Source: Company, Angel Research

Investment rationale
New CPPs to reduce power costs: Madras Cements which currently has 112MW of captive power plants (CPPs) is currently in the process of adding another 45MW of CPPs, thereby taking its total CPP capacity to ~157MW. We expect the increase in CPPs to result in lower per tonne power and fuel costs. The companys efficiency too has improved as indicated by reduction in the electricity consumption per tonne of cement from 83kwh in FY2011 to 78kwh in FY2012. Coal consumed per tonne of clinker too has reduced from 0.14 tonne to 0.12 tonne. Unfavorable plant locations: Around 93% of the company's total capacity is in Tamil Nadu (TN; 68%) and Andhra Pradesh (AP; 25%). As per our estimates, in FY2013E, AP is expected to witness India's highest indigenous demand-supply gap in cement with supply exceeding by 42mt. Also, there is no nearby state witnessing a supply-deficit where Madras Cements could direct supplies more economically than other states. The capacity situation in TN is slightly better, with an estimated demand-supply gap of 18.1mt and a nearby supply-deficit state of Kerala (total deficit expected to be 8.6mt), where it can supply a large part of its excess more economically than Karnataka. Capacities in both these states (TN and AP) are expected to register extended low capacity utilization and margins.

August 9, 2012

Madras Cements | 1QFY2013 Result Update

Outlook and valuation

Going ahead, we expect Madras Cements to post a 10.2% and 5.8% CAGR in its top-line and bottom-line respectively over FY2012-14. At the current market price, the stock is trading at a moderate valuation of US$65 EV/tonne on current capacity (US$60 on FY2014E capacity). However, considering its unfavorable locational presence and risk of margin pressure, we continue to maintain our Neutral recommendation on the stock.

Exhibit 7: Change in estimates

(` cr) Earlier Net Sales Operating Exp. Operating Profit Depreciation Interest PBT Tax PAT
3,434 2,559 875 257 146 501 165 336

FY2013E Revised
3,444 2,567 877 258 135 517 171 346

FY2014E Var. (%)

0.3 0.3 0.2 0.5 (7.6) 3.1 3.1 3.1

Earlier
3,777 2,790 987 262 115 641 212 430

Revised
3,786 2,845 941 263 107 606 200 406

Var. (%)
0.2 2.0 (4.7) 0.5 (7.6) (5.6) (5.6) (5.6)

Source: Company, Angel Research

Exhibit 8: One-year forward EV/tonne (US$)

80,000 70,000 60,000 EV(` mn) 50,000 40,000 30,000 20,000 10,000 0 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 EV/tonne $50 $70 $90 $110

Source: BSE, Company, Angel Research

Exhibit 9: Recommendation summary

Company ACC* Ambuja Cements* India Cements JK Lakshmi Madras Cement Shree Cements UltraTech Cements Reco Neutral Neutral Neutral Neutral Neutral Neutral Neutral CMP (`) 1,338 193 86 97 171 3,087 1,654 Tgt. Price (`) Upside (%) FY2014E P/BV (x) 3.0 3.3 0.7 0.8 1.5 3.2 2.6 FY2014E P/E (x) 16.5 16.1 7.5 5.4 9.4 13.7 15.4 FY2012-14E EPS CAGR 7.3 21.4 8.5 41.7 5.8 67.7 9.9 FY2014E RoE (%) 19.0 19.8 9.5 14.6 16.9 26.0 18.3 EV/tonne^ US $ 129 162 49 45 65 101 160

Source: Company, Angel Research; Note: *Y/E December; ^ Computed on TTM basis

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Madras Cements | 1QFY2013 Result Update

Company Background
Madras Cements is one of the largest cement players in southern India, with a capacity of 14.5mtpa (incl 1.95mtpa of split grinding capacities). The capacities are spread across TN (9.55mtpa), AP (3.7mtpa); and Karnataka (0.3mtpa). Apart from these, the company has a grinding plant at Kolaghat in West Bengal (1mtpa) and also a wind power generation capacity of ~159MW.

Profit and loss statement (Standalone)

Y/E March (` cr) Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of net Sales) Depreciation & amortization EBIT % chg (% of net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) % chg (% of net Sales) Basic EPS (`) Fully diluted EPS (`) % chg FY09 2,457 22.1 1,678 299 602 110 666 779 3.5 31.7 138 641 (2.7) 26.1 110 15 2.8 546 (11.5) 0 546 182 33.3 364 (10.8) 14.8 15.3 15.3 (55.4) FY10 2,801 14.0 1,944 398 596 137 812 857 10.0 30.6 196 661 3.1 23.6 151 20 3.8 530 (2.9) (0) 531 177 33.3 354 (2.9) 12.6 14.9 14.9 (2.9) FY11 2,605 (7.0) 1,987 391 661 154 782 617 (28.0) 23.7 221 397 (40.0) 15.2 139 40 13.4 297 (44.0) (0) 297 86 29.0 211 (40.4) 8.1 8.9 8.9 (40.4) FY12 3,236 24.2 2,318 438 730 171 979 918 48.7 28.4 254 664 67.4 20.5 158 52 9.3 557 87.5 (0) 557 172 30.9 385 82.5 11.9 16.2 16.2 82.5 FY13E 3,608 11.5 2,619 490 794 188 1,147 989 7.8 27.4 300 689 3.8 19.1 168 33 5.9 554 (0.6) 554 183 33.0 371 (3.6) 10.3 15.6 15.6 (3.6) FY14E 3,928 8.9 2,873 541 859 207 1,266 1,055 6.6 26.9 305 750 8.7 19.1 140 33 5.2 643 16.0 643 212 33.0 431 16.0 11.0 18.1 18.1 16.0

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Madras Cements | 1QFY2013 Result Update

Balance Sheet (Standalone)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Total loans Deferred tax liability Other Long term Liabilities Long term provisions Total Liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net Block Capital work-in-progress Investments Long term loans and adv Current assets Cash Loans & advances Other Current liabilities Net current assets Misc. exp. not written off Total Assets 914 39 456 419 440 473 16 4,214 1,135 35 532 568 546 589 21 4,710 3,918 918 3,000 635 89 4,811 1,119 3,693 318 89 5,110 1,318 3,793 546 267 166 933 40 325 567 290 642 5,415 5,670 1,555 4,115 528 267 110 1,039 47 292 699 296 743 5,763 5,970 1,855 4,115 278 317 110 1,126 83 287 756 263 863 5,682 6,070 2,161 3,910 228 317 110 1,220 118 274 828 282 939 5,503 4,214 4,710 24 1,236 1,260 2,463 490 24 1,534 1,558 2,567 585 24 1,711 1,735 2,791 589 287 12 5,415 24 2,027 2,050 2,710 649 320 33 5,763 24 2,346 2,370 2,310 649 320 33 5,682 24 2,717 2,740 1,760 649 320 33 5,503 FY09 FY10 FY11 FY12E FY13E FY14E

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Madras Cements | 1QFY2013 Result Update

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc)/ Dec in Fixed Assets (Inc)/ Dec in Investments Other income Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in cash Opening cash balances Closing cash balances 828 56 36 736 16 23 39 103 56 (7) 55 (3) 39 35 225 35 (137) 327 5 35 40 (81) 54 (137) 3 7 40 47 (452) 35 47 83 (610) 35 83 118 (400) 52 (550) 60 FY09 546 138 (80) 15 62 527 (1,262) 0 15 (1,247) FY10 531 196 (119) 20 89 498 (576) (0) 20 (556) FY11 297 221 (49) 40 86 343 (527) (179) 40 (666) FY12E 557 254 (93) 52 172 494 (542) 1 52 (489) FY13E 554 300 (84) 33 183 554 (50) (50) 33 (67) FY14E 643 305 (40) 33 212 662 (50) 33 (17)

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Madras Cements | 1QFY2013 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 1.9 3.0 5.8 1.6 2.8 4.4 1.5 4.3 2.8 1.3 2.8 4.2 0.9 2.1 4.1 0.5 1.4 5.4 0.7 42 11 92 59 0.6 48 16 93 64 0.5 56 23 77 81 0.6 50 22 46 73 0.6 53 21 39 75 0.7 54 19 35 74 17.9 22.4 32.9 14.8 17.1 25.1 7.8 8.8 12.8 11.9 13.5 20.3 12.0 13.4 16.8 13.4 14.7 16.9 26.1 66.7 0.7 12.0 3.6 1.9 27.7 23.6 66.7 0.6 10.0 4.0 1.8 20.6 15.2 71.0 0.5 5.6 3.7 1.6 8.7 20.5 69.1 0.6 8.3 4.0 1.5 14.5 19.1 67.0 0.6 8.2 4.5 1.1 12.3 19.1 67.0 0.7 9.1 4.6 0.8 12.8 15.3 15.3 21.1 2.3 53.0 14.9 14.9 23.1 2.3 65.5 8.9 8.9 18.1 1.5 72.9 16.2 16.2 26.9 2.3 86.2 15.6 15.6 28.2 2.2 99.6 18.1 18.1 30.9 2.5 115.2 11.2 8.1 3.2 1.4 2.5 8.0 1.5 11.5 7.4 2.6 1.4 2.4 7.9 1.4 19.3 9.4 2.3 0.9 2.6 11.0 1.3 10.6 6.4 2.0 1.3 2.1 7.4 1.2 11.0 6.1 1.7 1.3 1.8 6.6 1.1 9.4 5.5 1.5 1.5 1.5 5.7 1.1 FY09 FY10 FY11 FY12 FY13E FY14E

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Madras Cements | 1QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Madras Cements No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 9, 2012

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