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S. Vaidya Nathan

INVESTMENTS can be contemplated in the Madras Cements' stock at about Rs 5,900. This represents a change in our stance on the stock.

On June 29, Business Line recommended `booking profits' to capitalise on the appreciation of about 45 per cent from February. Investors who had acted on the recommendation would have had the option to exit in the Rs 5,600-plus range.

The revised investment recommendation is driven by the likelihood of the price settling at a higher level when the recently-announced stock-split takes effect. It is also influenced by the strong fundamentals, with earnings growth likely to be considerably higher than in 2002-03.

Madras Cements plans to cut the face value of its share from Rs 100 to Rs 10. For every share held, shareholders will be issued 10 shares. This is likely to improve liquidity in the stock, which is of importance as, even at the best of times, daily trading volumes get capped at 1,700-2,500 shares.

The recent move to split the face value also represents the first initiative by a company, with conservative roots, to improve the marketability of the stock, especially to institutional investors.

As usual, profitability in the October-December quarter is likely to come under strain as the monsoon may dampen construction activity, and with it demand and prices.

However, this is unlikely to have a negative bearing on the stock price unless the North-East monsoon fails, which could affect demand in subsequent months.

Madras Cements had closed out the April-June quarter with a sharp spike of about 35 per cent in pre-tax earnings.

The improvement in cement price levels in Kerala and Tamil Nadu should enable the company maintain profitability levels.

The steady decline in interest costs and the higher operating efficiencies, which have helped Madras Cements weather difficult periods in the past, are positive factors that continue to work for the company. These could magnify the effect on earnings.

As it battles for market share, Madras Cements may also benefit from the relatively weak financial positioning of its regional competitors. Its ability to raise debt at fine rates has the potential to help further lower interest costs.

These factors should enable it take on competitive pressures from the two big combines — ACC/Gujarat Ambuja, and Grasim/Larsen and Toubro — in the southern markets.

A cause for concern is the relatively lower price levels that continue to prevail in the AP market where Madras Cements sells a sizeable part of its output.

The position of excess supply in the southern market, following sizeable additions to capacity in Tamil Nadu and Andhra Pradesh, is likely to prevail for a few more years. But the discipline in fresh capacity creation, evident over the past 15 months, is likely to continue.

This may compress the time-frame in which producers have better pricing power. Such a situation will benefit Madras Cements, which has managed to ramp up its capacity through new units and, hence, operates at higher efficiencies.

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