Madras Cement: Low realisations

Face pressure on both realisations and cost

Madras Cement reported a 15.8 per cent growth in profit before tax to Rs 15.61 crore for the March quarter, on the back of a 8.67 per cent growth in sales. Operating profit, however, rose by just 2.06 per cent, as the company faced pressure not only on cost but also on realisation.

Cement realisations in the company's key Tamil Nadu market were up only two per cent on a y-o-y basis in the last quarter, and in other southern markets such as Andhra Pradesh they fell about 8 per cent.

Price realisations in the southern market have been sluggish compared with other parts of the country, because of a surplus of about 12.7 million tonne of cement by the end of FY05.

On the cost front, Madras Cement reported a 587 basis points jump in power and fuel cost as a percentage of sales, largely due to the significant increase in the cost of imported coal and pet coke.

Similarly, for transportation and handling, the ratio rose 158 basis points to 13.58 per cent last quarter.

As a result, operating profit margin dropped 126 basis points to 19.46 per cent. Profit before tax grew at a higher rate of 15.8 per cent mainly because of a 13 per cent cut in interest cost.

Going forward, price realisations for the company could weaken further as Dalmia Cement's additional two million capacity in Southern India is expected to come on stream by July 2005.

Another area for concern is the non-implementation of VAT in Tamil Nadu, which is expected to reduce the possibility of better realisations in the short term.

That's because current sales tax rates in Tamil Nadu are higher than prescribed VAT rates. Given the limited upside in earnings growth, the stock is rather expensive at nearly 20 times forward earnings.

Rising money supply

One doesn't have to go very far to find out the secret why the bond market is rallying and bond yields are being pushed down. The reason: higher money supply. The rate of growth of money supply (M3) has risen to 3.4 per cent this fiscal (till May 27) compared to a growth of 2.7 per cent in the same period last year.

What's pushing this growth in money supply? Surprisingly, it's not a rise in the net foreign exchange assets of banks that is fuelling this increase-these assets have actually fallen by Rs 10,474 crore this fiscal to May 27, compared to a rise of Rs 53,093 crore over the same period last year.

Rather, the reason lies in the explosive growth in bank credit. Between April 1 and May 27, 2005, bank credit rose by 4.1 per cent or Rs 51,940 crore, compared to a rise of 1.9 per cent or Rs 19,512 crore for the corresponding period of last year.

Significantly, although the growth in M3 for the current fiscal year is higher, the y-o-y growth rate is significantly lower, at 13.7 per cent (after adjusting for the IDBI merger), compared to 15.5 per cent for the previous period. That indicates that money supply growth has spurted recently.

Reserve money growth too has been higher at 3.3 per cent this fiscal to June 10, compared with -0.4 per cent over the same period last year. Net RBI credit to government has been much higher this fiscal.

Going forward, with the rise in FII inflows this month, M3 growth could increase further.

Ucal Fuel Systems

Ucal Fuel Systems' results for the year ended March 2005 show that not all auto component companies have been doing great business lately. Its revenues grew just five per cent in the year till March 2005 and worse still, earnings fell by almost 18 per cent.

Ucal Fuel enjoys leadership in carburettor technology for cars and two-wheelers in the domestic market. Roughly 85-90 per cent of its turnover comes from the domestic market, with a large chunk coming from the OEM original equipment manufacturer) segment.

Since Ucal Fuel was already supplying to a wide base of customers, it looks like a high base has caught up. What made things worse was a price reduction Ucal gave some of its customers.

With raw material cost also on the rise, profitability took a big hit. For the whole year, operating margin fell by over 400 basis points to 17 per cent.

As a result, operating profit fell 15.4 per cent. The company felt the brunt of the price cuts and the rise in costs in the March quarter, when operating margin fell over 800 basis points and operating profit fell 43 per cent. The Ucal Fuel stock reacted by falling about three per cent on Friday.

It now trades at Rs 255 or 13.8 times FY05 earnings. The valuation doesn't look stretched, but one also has to keep in mind the fact that earnings have been under pressure.

The Ucal Fuel stock was earlier re-rated by around 40 per cent after it announced the acquisition of US-based Amtec Precision Products earlier this year.

The acquisition will add more than 100 per cent to Ucal's topline on an annual basis, and what's more it cost the company only around 0.5 times sales. However, it remains to be seen what synergies come out of this deal, and whether it will turn around Ucal's fortunes.

With contributions from Mobis Philipose and Amriteshwar Mathur