1QFY2012 Result Update | Cement

August 11, 2011

Madras Cements
Performance Highlights
Y/E March (` cr) Net revenue Operating profit OPM (%) Net profit
Source: Company, Angel Research

NEUTRAL
CMP Target Price
% chg (qoq) 11.3 33.3 537bp 53.8 1QFY11 697 196 28.1 73 % chg (yoy) 9.6 27.0 445bp 35.1

`88 -

1QFY12 764 248 32.5 98

4QFY11 686 186 27.1 64

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Cement 2,085 0.7 133/80 72366 1 17,059 5,138 MSCM.BO MC@IN

For 1QFY2012, Madras Cements (MAC) posted robust performance, with net profit surging by 35.1% yoy and 53.8% qoq to `98cr. The impressive performance was on account of a 25.2% yoy improvement in realisation due to high cement prices sustained in the companys prime markets in the southern region. However, dispatches at ~1.74mn tonnes declined by 11.2% yoy due to a low demand scenario in the south. We remain Neutral on the stock. OPM at robust 32.5%: MAC registered 9.6% yoy top-line growth to `764cr, due to a 25.2% increase in cement realisation to ~`4,207/tonne. Realisation was higher by 7.4% on a sequential basis as well. The company continued to face muted cement demand due to political uncertainty in Andhra Pradesh and slow pick-up in Tamil Nadu post elections. On the operating front, the companys profit rose by 27% yoy due to spike in realisation and high captive power consumption, resulting in a 445bp expansion in OPM to 32.5%. MAC had commissioned 40MW of new thermal capacity in FY2011. Net profit for the quarter rose by 35.1% yoy to `98cr. Outlook and valuation: We expect the companys dispatches to remain muted in the next few months due to the onset of monsoons in Andhra Pradesh and Tamil Nadu. Although cement prices have been sustained at healthy levels in the south despite low demand, prices are expected to correct going ahead if the demand situation weakens further. We expect MAC to post a CAGR of 12.7% in its bottom line over FY201113E. At the CMP, the stock is trading at EV/EBITDA of 5.9x and EV/tonne of US$77 on FY2013 estimates. We remain Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 42.0 28.8 8.1 21.1

Abs. (%) Sensex MAC

3m

1yr

3yr 10.0 (34.6)

(8.2) (5.6) (6.9) (13.5)

Key financials
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 EV/EBITDA
Source: Company, Angel Research

FY2010 2,801 14.0 354 (2.8 14.9 30.6 5.9 1.3 25.1 14.8 1.7 95 5.6

FY2011 2,605 (7.0) 211 (40.4) 8.9 23.7 9.9 1.2 12.8 8.1 1.8 100 7.8

FY2012E 2,811 7.9 219 3.9 9.2 24.2 9.5 1.1 12.0 8.8 1.7 83 7.0

FY2013E 3,115 10.8 268 22.2 11.3 23.7 7.8 1.0 13.1 9.9 1.4 77 5.9

V Srinivasan
022-40403800 Ext 6831 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

Madras Cements | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance

Y/E March (` cr) Net sales Other operating income 1QFY2012 764 4 4QFY2011 686 16 % chg (qoq) 11.3 1QFY2011 697 3 % chg (yoy) 9.6 FY2011 2,605 31 FY2010 2,801 13 % chg (7.0)

Total operating income

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 Extr. income/(expense) Provision for Taxation (% of PBT) Reported PAT PATM (%) EPS (`)
Source: Company, Angel Research

768
119 15.6 163 21.4 42 5.4 117 15.3 79 10.3 520 248 32.5 48 64 2 138 40 29.0 98 12.8 4.1

703
115 16.8 166 24.2 35 5.1 124 18.1 76 11.0 516 186 27.1 34 58 2 96 32 33.5 64 9.3 2.7

9.3
3.1 (2.0) 19.5 (5.5) 4.0 0.6 33.3 39.4 10.7 (1.6) 44.2 25.1 53.8

700
84 12.0 174 25.0 39 5.6 123 17.6 85 12.2 505 196 28.1 35 54 2 109 36 33.2 73 10.4 3.1

9.7
42.1 (6.3) 5.6 (4.4) (7) 3.0 27.0 4.45 36.6 19.4 0.6 (59.4) 11.2 35.1

2,636
391 15.0 661 25.4 154 5.9 464 17.8 318 12.2 1,987 649 24.9 139 221 9 297 86 29.0 211 8.1 8.9

2,814
398 14.2 596 21.3 137 4.9 468 16.7 344 12.3 1,944 870 31.1 151 196 7 530 177 33.3 354 12.6 14.9

(6.3)
(2.0) 10.8 12.2 (0.9) (7.5) 2.2 (25.4) (7.7) 12.6 16.2 (44.0) (51.2) (40.3)

Exhibit 2: Financial performance

(` cr) 1,000 750 500 250 29 0 4QFY10 1QFY11 2QFY11 3QFY11 Net Sales (LHS) Net Profit (LHS) 4QFY11 1QFY12 OPM (RHS) 73 31 43 64 700 686 583 20 10 0 764 30 (%) 40

666

650

98

Source: Company, Angel Research

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Madras Cements | 1QFY2012 Result Update

Exhibit 3: 1QFY2012 Actual vs. Angel estimates

(` cr) Net sales Operating profit OPM (%) Net profit
Source: Company, Angel Research

Actual 764 248 32.5 98

Estimates 711 165 23.2 48

Variation (%) 7.4 50.7 931bp 104.3

Operational performance
Revenue of the cement division increased by 11.2% yoy to `732cr. Dispatches declined by ~11.2% yoy to `1.74mn tonnes, affected by low demand due to continuing political uncertainty in Andhra Pradesh and low pick-up post elections in Tamil Nadu and Kerala. MACs per tonne cement realisation increased by 25.2% yoy to `4,207. Revenue of the wind mill division declined by 15.8% yoy to `32cr. The company had sold 26.4MW of wind plants in 2QFY2011, which led to lower yoy power generation in 1QFY2012. The company registered a 60% yoy hike in raw-material cost per tonne of cement, which, however, was flat on a qoq basis. Power and fuel cost per tonne rose by 5.5% yoy to `938 on account of increased prices of imported coal. Global coal prices were higher by ~20% during the quarter to US$120/tonne. However, the company was not majorly affected by the 30% increase in domestic coal prices effected by Coal India, as the company sources only ~25% of its coal requirements locally. Freight cost increased by 7.7% yoy to `673/tonne, although it was down by 7.7% sequentially. The companys operating profit per tonne of cement stood at `1,284 during the quarter, up 54.9% yoy and 17.3% qoq. Exhibit 4: Dispatches and realisation trend
2.50 2.00 4500 4000 3500 3000 2500 2000 0.50 0.00 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Dispatches Realisation (RHS)

1.00

1500 1000

Source: Company, Angel Research

August 11, 2011

(`/tonne)

(mtpa)

1.50

Madras Cements | 1QFY2012 Result Update

Exhibit 5: Per tonne analysis

Particulars (`) Realisation/tonne Raw-material cost/tonne Power and fuel cost /tonne Freight cost/tonne Other costs/tonne Operating profit/tonne
Source: Company, Angel Research

1QFY2012 4QFY2011 1QFY2011 % chg (yoy) % chg (qoq) 4,207 684 938 673 453 1,284 4,009 679 979 729 446 1,094 3,362 427 889 625 433 829 25.2 60.0 5.5 7.7 4.6 54.9 4.9 0.7 (4.2) (7.7) 1.6 17.3

Exhibit 6: Segment-wise revenue break-up

(` cr) Cement Windmill Total (Net)
Source: Company, Angel Research

1QFY12 732 32 764

1QFY11 659 38 687

chg % yoy 11.2 (15.8) 11.3

FY11 2,483 122 2,546

FY10 2,667 134 2,778

chg % (6.9) (9.0) (8.4)

August 11, 2011

Madras Cements | 1QFY2012 Result Update

Investment arguments
Major player in the south with a limited presence in Andhra Pradesh: MAC is a major cement player in the southern region, with total cement capacity of 10.5mtpa. The companys second clinkerisation unit with capacity of 2mtpa at its Ariyalur plant is expected to be operational by 2QFY2012. The company is also increasing the grinding capacity from 210 tonnes per hour (tph) to 260 tph at its RR Nagar plant by installing a roll press at a cost of `60cr. The company expects to complete this expansion by March 2012. Similarly, grinding capacity at the Salem plant is also being expanded from 90tph to 230tph by installation of rolling press at a cost of `60cr. The company expects to complete the Salem plant expansion by December 2011. Post this expansion, the companys capacity will more than double over FY200712E. We believe the company will be well placed to benefit from the pick-up in demand as it has already completed its planned capacity additions. MAC derives a major portion (~50) of its cement revenue from Tamil Nadu, and its presence in Andhra Pradesh, the worst affected region in terms of demand slowdown, is limited. Thus, the company is better placed than other players that have higher exposure to Andhra Pradesh.

Exhibit 7: Installed capacity

(mtpa) 16.0 12.5 12.0 8.0 6.0 10.0 10.5 10.5 12.5

8.0

4.0

0.0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, Angel Research

Installation of new captive power capacities to reduce power costs: MAC is currently in the process of setting up a 60MW (3x20MW) thermal power plant at its Ariyalur factory. Out of the three units, two units have already been commissioned in November 2010 and February 2011. The 20MW plant in Ariyalur is expected to be commissioned by December 2011. Further, the 25MW plant in RR Nagar is expected to be commissioned by August 2011. MAC is also in the process of commissioning a 5MW heavy fuel oil-based power generator at the Salem grinding unit. Going ahead, power costs are expected to be reduced considerably due to the commissioning of these captive plants.

August 11, 2011

Madras Cements | 1QFY2012 Result Update

Outlook and valuation

We expect MACs dispatches to remain muted in the next few months due to the onset of monsoons in Andhra Pradesh and Tamil Nadu. Although cement prices have been sustained at healthy levels in the south despite low demand, prices are expected to correct going ahead if the demand situation weakens further. We expect MAC to post a CAGR of 12.7% in its bottom line over FY201113E. At the CMP, the stock is trading at EV/EBITDA of 5.9x and EV/tonne of US$77 on FY2013 estimates. We remain Neutral on the stock.

Exhibit 8: Change in estimates

(` cr) Parameter Net sales Operating exp. Operating profit Depreciation Interest PBT Tax PAT Earlier
3,033 2,372 662 236 166 278 90 188

FY2012 Revised
2,811 2,131 679 223 171 325 105 219

FY2013 Var (%)

(7.3) (10.1) 2.6 (5.7) 2.9 16.8 17.0 16.6

Earlier
3,467 2,725 742 238 154 370 120 250

Revised Var (%)

3,115 2,376 739 225 159 397 129 268 (10.1) (12.8) (0.4) (5.6) 3.1 7.2 7.2 7.2

Source: Company, Angel Research

Exhibit 9: One-year forward EV/tonne (US$)

90,000 80,000 70,000 60,000

EV (` mn)

50,000 40,000 30,000 20,000 10,000 0 Apr-06 Apr-07 EV Apr-08 $70 Apr-09 $90 Apr-10 $110 Apr-11 $130

Source: Company, Angel Research

August 11, 2011

Madras Cements | 1QFY2012 Result Update

Exhibit 10: Recommendation summary

Company ACC^ India Cements JK Lakshmi Madras Cements Ultratech Cement Reco. Neutral Neutral Buy Neutral Neutral CMP (`) 1,006 130 70 43 88 1,022 Ambuja Cements^ Neutral Tgt. Price (`) 52 Upside (%) 21.9 FY2013E P/BV (x) 2.4 2.2 0.6 0.4 1.0 2.0 FY2013E P/E (x) 15.4 15.0 8.0 5.8 7.8 12.0 FY2011-13E EPS CAGR (%) 4.6 2.7 98.6 22.8 12.7 29.1 FY2013E RoCE (%) 20.4 19.9 6.9 7.8 9.9 18.2 FY2013E RoE (%) 16.2 15.6 6.6 7.8 13.1 17.5

Source: Company, Angel Research; Note: ^Y/E December

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Madras Cements | 1QFY2012 Result Update

Profit and loss statement

Y/E March (` cr) Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation 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 FY08 2,012 27.8% 1,260 248 408 81 523 752 35.3 37.4 93 659 36.1 32.8 52 9 1.5 617 31.6 0 617 209 33.8 408 32.5 20.3 34 34 34.5 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 15 (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 15 15 (2.8) 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 9 9 (40.4) FY12E 2,811 7.9% 2,131 425 682 169 855 679 10.0 24.2 223 457 15.1 16.2 171 39 12.0 325 9.2 325 105 32.4 219 4.0 7.8 9 9 3.9 FY13E 3,115 10.8% 2,376 473 760 186 956 739 8.9 23.7 225 515 12.7 16.5 159 41 10.2 397 22.2 397 129 32.4 268 22.2 8.6 11 11 22.2

August 11, 2011

Madras Cements | 1QFY2012 Result Update

Balance Sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 2,714 808 1,906 576 89 779 23 452 304 402 378 3 2,952 3,918 918 3,000 635 89 914 39 456 419 440 473 16 4,214 4,811 1,119 3,693 318 89 1,135 35 532 568 546 589 21 4,710 5,266 1,320 3,946 543 89 1,099 40 484 575 590 509 28 5,115 5,566 1,542 4,023 543 89 1,058 19 471 568 508 550 28 5,233 5,616 1,767 3,849 543 89 1,162 58 463 642 527 635 28 5,144 12 942 954 1,636 363 2,952 24 1,236 1,260 2,463 490 4,214 24 1,534 1,558 2,567 585 4,710 24 1,711 1,735 2,791 589 5,115 24 1,899 1,923 2,721 589 5,233 24 2,130 2,154 2,401 589 5,144 FY08 FY09 FY10 FY11E FY12E FY13E

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Madras Cements | 1QFY2012 Result Update

Cash flow statement Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc)/ Decin 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 FY08 617 93 (191) 9 79 430 (0) 9 (0) 958 56 62 840 (34) 57 23 828 56 36 736 16 23 39 103 56 (7) 55 (3) 39 35 225 35 22 168 5 35 40 (101) (21) 40 19 (357) 38 19 58 (70) 31 (320) 37 FY09 546 138 (80) 15 62 527 0 15 FY10 FY11E FY12E FY13E 531 196 (119) 20 89 498 (576) (0) 20 (556) 297 221 85 40 86 477 (680) (0) 40 (640) 325 223 (62) 39 105 341 (300) 39 (261) 397 225 (47) 41 129 405 (50) 41 (9)

(1,314) (1,262)

(1,304) (1,247)

August 11, 2011

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Madras Cements | 1QFY2012 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.)
1.6 2.0 12.7 1.9 3.0 5.8 1.6 2.8 4.4 1.5 4.3 2.8 1.4 3.8 2.7 1.0 3.0 3.2 0.9 34 12 115 47 0.7 42 11 92 59 0.6 48 16 93 64 0.5 56 24 104 72 0.5 53 21 94 65 0.6 52 19 80 65 29.1 37.6 50.4 17.9 22.4 32.9 14.8 17.1 25.1 8.1 9.1 12.8 8.8 10.1 12.0 9.9 11.4 13.1 32.8 66.2 0.9 19.6 3.0 1.2 39.6 26.1 66.7 0.7 12.0 3.6 1.7 26.6 23.6 66.7 0.6 10.0 4.0 1.7 20.2 15.2 71.0 0.5 5.8 3.7 1.6 9.0 16.2 67.6 0.5 6.0 4.2 1.4 8.6 16.5 67.6 0.6 6.8 4.2 1.2 9.8 34.3 34.3 42.1 4.7 80.1 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 9.2 9.2 18.6 1.3 80.8 11.3 11.3 20.7 1.6 90.5 2.6 2.1 1.1 5.4 1.2 3.1 0.8 5.7 4.2 1.7 2.7 1.7 5.5 1.0 5.9 3.8 1.3 2.7 1.7 5.6 1.0 9.9 4.8 1.2 1.7 1.8 7.8 0.9 9.5 4.7 1.1 1.5 1.7 7.0 0.9 7.8 4.2 1.0 1.8 1.4 5.9 0.9

FY08

FY09

FY10

FY11E

FY12E

FY13E

August 11, 2011

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Madras Cements | 1QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

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 11, 2011

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