CHENNAI, Dec 15: The half-yearly results posted by Madras Cements and India Cements (ICL) surprised the market though for diametrically opposite reasons.ICL managed to buck the recent trend of lower margins experienced by cement majors by marginally improving the operating margin.

On the other hand, Madras Cements, one of the most efficient producers of cement in the country, saw its operating profit decline by about six per cent and the profits by 53 per cent. Both did exactly the opposite of what was expected of them.

Despite this performance, analysts opine that Madras Cements is a better investment proposition than ICL. The reasons -- the factors that resulted in Madras Cements faring badly in the first-half are unlikely to recur in the second-half.

They are sceptical about ICL's ability to use the additional capacity that is proposed to be created consequent to its aggressive expansion. Moreover, they are surprised at the lower interest cost incurred by ICL compared to Madras Cements though the former has a fatter debt portfolio. They feel the interest burden could be much higher in the second-half.

Although the new 9 lakh-tonne plant commissioned by both companies worked at low capacities -- ICL's Dalavoi plant at 35 per cent and Madras Cements' Alathiyur plant at 45 per cent -- ICL was able to fare better as its existing plants worked more efficiently and saved on power, fuel and labour (through VRS). This helped the company prune costs.

Madras Cements could not do that as the capacity utilisation fell as the raw mill at its Jayantipuram plant broke down. In spite of the R R Nagar plant working at 127 per cent capacity with the help of clinker transported from the new plant at Alathiyur, the existing facilities could not make up for the low capacity utilisation of the new plant.

This meant that the company was unable to recover its interest cost incurred on the new plant which was predominantly funded by debt.

Moreover, the company had to incur certain additional costs. In order to partly make up the break down in clinker production at the Jayantipuram unit, it outsourced 60,000 tonnes of clinker paying Rs 500 per tonne more than its cost of production.

The company also incurred higher freight cost of around Rs 2.50 crore for transporting clinker from Alathiyur plant to R R Nagar plant. This, the company had to do as the clinkerisation of the Alathiyur plant was commissioned in March, while the cement plant was commissioned in June. It also incurred higher repairs and maintenance cost.

Since Madras Cements sold its cement in the surplus market of Andhra Pradesh and Karnataka (here realisations are lower by Rs 600 to Rs 700 per tonne), its realisation was lower to the extent of 35 per cent of its turnover. ICL, on the other hand, sells 85 per cent of its production to the cement deficit market of Tamil Nadu and Kerala where realisations are better.

The Madras Cements scrip has taken a beating in the bourses and has lost 23 per cent after the declaration of the results and is now quoting at its new 52-week low of Rs 4270.

Analysts say that it is a good pick at the current level with a medium-term perspective. ICL has also slipped from Rs 74 to Rs 70 after the announcement of results despite lack of liquidity in the counter.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.