Investor's Eye: Update - Madras Cements; Viewpoint - Tata Communication

 

Investor's Eye [September 19, 2013]  Sharekhan www.sharekhan.com

Summary of Contents       STOCK UPDATE Madras Cements Recommendation: Hold Price target: Rs210 Current market price: Rs173 Annual report review Key points In spite of weak business environment Madras Cements clocked decent revenue growth for FY2013: Despite the overall slowdown in the economy and a tough business environment, the revenues of Madras Cements grew by a decent 19% in FY2013. The strong revenue growth was achieved on account of capacity addition and a revival in the cement demand, especially in Tamil Nadu, in the first half of FY2013. Madras Cements is a predominant cement player in the southern region with special focus on Tamil Nadu and Andhra Pradesh. In FY2013, the diesel prices witnessed a constant upward revision (Rs7.83 year on year [YoY]). The freight cost, one of the major cost components, increased by 22% on a per tonne basis. Moreover, the higher freight charges along with a surge in other expenditure resulted in contraction in the company's overall operating profit margin (OPM), which declined by 280 basis points compared with that a year ago. The OPM for FY2013 stood at 26.3% as compared with 29.1% in FY2012. Company's name to be changed to The Ramco Cement Ltd: The company's shareholder have approved to change the name of the company from Madras Cements to The Ramco Cements Ltd. Ramco is the brand name under which the company's products are sold. Identification of the company's name with the brand name will be advantageous in the long run for brand building. Return ration remains healthy; dividend pay-out improves: The company's debtor days stood at 29 days (as compared with 24 days in FY2012) and its inventory days remained in line with that of last year's at 52 days. Due to an increase in the working capital requirement on account of a sluggish business environment, the cash flow from the operating activities declined to Rs701 crore from Rs863.8 crore in FY2012. For FY2013, the return on equity (RoE) declined marginally to 18% from 20% in FY2012, but even after the decline the RoE remained at a fairly healthy level. During the year, the asset turnover ratio has also improved from 59% to 65%. The key improvement was in the dividend pay-out, which improved from 15% in FY2012 to 18% in FY2013. We believe that the company may further improve its dividend payout ratio in the coming years. Management outlook on cement sector: As per the management, the cement industry is expected to grow by 8% during FY2013-14. The increase in demand is expected to sustain due to the government spending on infrastructure projects, rural housing and development, and the general increase in the economic activities. However, the excess capacity created by the cement industry during the past years will have an impact on the production of cement and sales realisation. The capacity demand mismatch is expected to come down over the next few years, improving the capacity utilisation of the industry. The company would continue to focus on cost control measures and strategic decisions on production and distribution to protect and improve its profitability. Valuation: Given the sluggish demand environment in the southern region, we believe it will be a difficult task for the company to deliver a better volume growth in the near term. Further, a likely increase in the cement supply remains a key risk and higher freight costs could add pressure on the margin. We maintain our price target at Rs210 (valuing the company at enterprise value [EV]/tonne of $90 on capacity of 12.5mtpa) with a Hold recommendation on the stock. At the current market price, the stock trades at price/earnings (PE) of 10.3x, an EV/EBITDA of 6x FY2014E earnings.    VIEWPOINT Tata Communication TCL management meet We met the management of Tata Communication Ltd (TCL) to understand the business, and gain an insight on the strategy and the way forward. The following are the key takeaways on the same. GVS business-steady business, cash generator: The global voice services (GVS) division constitutes around 50% to the total revenue base for TCL. The revenues from the segment have grown at a compounded annual growth rate (CAGR) of 14.6% over FY2011-13 led by the international long-distance traffic (ILD), which grew at a CAGR of 14.2% over the same time frame. Going forward, the management stated that the GVS business has turned increasingly competitive. Also, the addressable market size has witnessed a decline due to which the GVS vertical is expected to grow in single digits (guided for 7-8% growth in future) led by the traffic growth while realisations are likely to remain flat or decline. It further mentioned that heavy investments have already been made in the segment and now the business is a robust cash-generating business (grew at a steady pace of 7-8% with consistent margin at 8-8.5%). Over the last three years, the GVS business has generated an annual average of Rs600 crore cash. Increased focus on global data and managed services: Currently, the global data and managed services (GDMS) vertical contributes 40% to the company's revenue base. The management is actively scouting for growth in this vertical via increasing its market share in the global enterprise arena and entering into the value added managed services business. The segment has grown at a CAGR of 18.7% over FY2011-13. Going forward, the management expects it to grow in the range of 18-20%. Global data margin to improve: The segment has witnessed a margin erosion over the last three years from a blended margin of 20.8% in FY2011. The margin declined to 16.8% in FY2013 due to increasing investments in the new businesses going through the growth mode (data centre and the automated teller machine [ATM] business) along with its enhanced investments in the new services and product development. Going forward, despite an increase in the business from the new verticals (ATM, data centre), the improved base and the increasing maturity of business would enable the vertical to report a higher margin. The management guided for a 17-18% margin from this vertical. Financials to improve; non-core asset monetisation key catalyst: On account of enhanced focus on data, improved thrust on cost rationalisation and measured capex, we believe that the financials of TCL are set to improve. Any development on the non-core asset monetisation would act as catalyst for balance sheet deleveraging and hence would be positive for the stock. At the current price, the stock is trading at 7.7x its FY2013 enterprise value (EV)/EBITDA. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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