From Research Desk - Madras Cements Ltd. (MCL) – Result Update Q3 FY07.

CMP – Rs3,418
Rating – BUY
Target – Rs4,270

MCL’s cement volumes increased by 27% y-o-y to 1.48mn ton and on sequential basis it went up by 1%. MCL has increased its despatches despite monsoon in the Southern States. We expect MCL’s despatches to be at 5.78mn ton for FY07, up from 5.66mn ton as per our previous estimation. We retain our FY08 and FY09 cement volume at 6.02mn ton and 7.49mn ton as new capacities comes in at FY08/FY09.

MCL’s OPM increased by 1560 bps to 32.7% on y-o-y basis but went down 620 bps on sequential basis due to increase in cost per ton of cement. Cost per ton increased by 4.8% sequentially to Rs1784 in Q3FY07. On y-o-y basis it increased by 3.0%. Higher coal prices in international market and increase in freight charges has led to increase in costs. Power & Fuel expenses per ton went up by 6.7% sequentially to Rs551 and freight charges increased by 9.8% to Rs374. Realization per ton fell by 4.7% sequentially to Rs2651. We have factored 2.3% fall in our estimations for the quarter. Cement price have rebound in Southern markets post monsoon and hovering at pre-monsoon levels at present.

Interest cost for the quarter has come down 24.6% y-o-y to Rs85mn. Sequentially it has more than doubled. Higher requirement for working capital due to fund requirement for ongoing expansion and interest rates firming up has increased the interest burden for Q3FY07 over Q2FY07.

We revise our FY07 earnings estimate from Rs291.2 to Rs280.7 and retain our FY08 and FY09 earnings estimates at Rs339.3 and Rs355.8 respectively. We consider MCL as better play in Southern region going forward. MCL is expanding cement capacity by 4mn ton to take the total capacity to 10mn ton by FY09. MCL is putting up 18MW CPP at Jayanthipuram facility by Q1FY08. MCL is trading at 10.1x and 9.6x of its estimated FY08 and FY09 earnings of Rs339.2 and Rs355.7 respectively. We maintain our BUY rating with target price of Rs4270. Our target price discounts FY09 earnings by 12.0x and EV/EBIDTA by 7.6x.