Madras Cements : Book Profits & Re-Enter Later

Recommendation: Book Profits & Re-Enter Later

S.Vaidya Nathan

Shareholders of Madras Cements can contemplate booking profits in the Rs 4600-Rs 4700 range as well as any further uptrend to take advantage of the recent spurt in price and the likelihood of sluggish earnings growth in 2001-02.

But Madras Cements continues to be one of the better exposures in the cement sector and has good efficiency levels. It is also poised for volume growth as capacities are to be enhanced over the next couple of years.

In this backdrop, re-entry at lower levels of around Rs 4000-4200 can be contemplated. The stock price had been rangebound in Rs 4300- Rs 4500 range and slipped to a low of around Rs 4000 in September. Since then it has gained around 18 per cent.

The performance for fiscal 2001-02 may at best show a flat earnings growth. The possibility of a decline in earnings can also not be ruled out since cement prices are unlikely to reach and sustain the kind of highs they did in the last quarter of 2000 and early 2001.

The rally in the southern markets had started earlier and continued till the elections ion Tamil Nadu saw a change in government. Subsequently prices fell sharply. Despite a recovery of sorts, prices in Tamil Nadu and Kerala are unlikely to sustain the Rs 175-Rs 200 levels that prevailed for much of 2000.

The demand growth has been sluggish and this may also cast a cap price trends and earnings growth. In the second quarter of July - September 2001, the company has reported a 93 per cent decline in profits. This has much to do with the differential price trends in 2000 and 2001. This period in 2000 saw prices at higher levels than in 2000. In line with usual trends, the October - December quarter would be hampered by the monsoon effect.

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In this backdrop, investors can use the recent uptrend to book profits. But the stock continues to be a good option from a long term perspective and so re-entry later should be contemplated.

Background : Madras Cements has used the strategy of going in for greenfield units instead of growth through acquisitions. This may ensure that all new capacities start contributing at high efficiency levels. The company plans to raise its capacity to 6 million tonnes over the next two years. This would ensure that it is not constrained on the volumes front as it was for some years in the second half of the 1990s.

Its new capacities as well as the continuing threat from other players may limit the scope for sharp price spurts. What could help Madras Cements in this context is its efficiency levels which could provide comfort in servicing its debt burden. The capacity expansion would be bankrolled by debt and internal accruals leaving the equity base untouched.

Suitability: Madras Cements' stock is appropriate for investors willing to take the risks of an economically-sensitive stock. A buy and hold strategy would not pay and investors should look at profit-booking in an active manner.