Recommendation: Buy
CMP = Rs 4,508
Price target: Rs 4,800
Key Points:
- Madras Cement Ltd's (MCL) capital expenditure plan is on track. The 2MTPA cement expansion work at Jayanthipuram kicked in September 2007 and the 2MTPA plant at Ariyalur is expected to be commissioned by June 2008. Going ahead, this expansion exercise will drive the much needed volume growth of the company.
- On account of the series of price hikes in Andhra Pradesh and Tamil Nadu in the first half of FY2008, MCL was able to enhance its profitability with its earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne standing the highest in the industry at Rs 1,500 in the second quarter of FY2008.
- Cement prices were hiked by Rs 3-4 per bag in Andhra Pradesh, Kerala and Tamil Nadu in early December and we expect a price hike of Rs 3-4 per bag in Karnataka in the coming week. This will drive the earnings of the company going ahead and will be a positive trigger for the stock.
- In the first half of FY2008 MCL recorded a 30% increase year on year (yoy) in its net sales to Rs 969.4 crore on account of higher volumes and better price realisation which in turn caused the operating profit to grow by 35% yoy. On the back of the robust operating level performance, the profit after tax (PAT) grew by 31% yoy to Rs 221 crore.
- As mentioned in one of our earlier updates, the company could reward its shareholders either with a bonus or with a stock split either of which will be a positive trigger for the stock.
- MCL's expansion plans will drive its volume growth going ahead. It plans to increase its capacity by 4MTPA by the end of FY2009. It is also investing in renewable energy and captive power plants (CPPs), which will keep a check on its variable costs and enable it to maintain its operating profit margin (OPM).
- At the current market price of Rs 4,508 the stock is trading at a price-to-earnings multiple of 11.6x discounting our FY2008 earnings estimate and at 9.1x discounting our FY2009 earnings estimate. It also trades at an enterprise value (EV)/tonne of USD152 on increased capacity.
- I maintain Buy recommendation on MCL with a price target of Rs 4,800 per share.
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