India is the second largest cement producer in the world, producing around 150 million tonne per annum. The boom in the construction activity, specifically in infrastructure and housing, presents a great opportunity for the cement industry. Overall, the cement industry recorded a growth rate of about 7.1% during the current half year ended June 2007. One of the biggest beneficiaries of infrastructure growth is the cement sector and it will continue as huge investments are lined up.
Chettinad Cement Corporation is a cement manufacturer mainly catering to the south market in India. Chettinad, as a company, stands a good chance, since the southern region contributes nearly 28% of all-India production of 133 million tonne in the FY2005-06.
Business
It had enhanced its cement capacity from 1.5 million tonne to 2 million tonne. Its capacity utilisation was 118% in FY2005-06, which is well above the industry average of 90%. And continuously its capacity utilisation is over 100% for the last five years. It had received in-principle approval to build a greenfield plant with a capacity of two million tonne at Ariyalur, in Tamil Nadu. The company?s two subsidiaries, Sabari Cements (Chennai) and High-Tech Lime Products, are already amalgamated last financial year. These companies own limestone quarries, thus giving Chettinad access to its most important raw material, limestone. This will reduce the cost of raw material over the long term. Considering the size of the operations and market, Chettinad is very small when compared to big players like ACC, Ambuja and Ultratech. But as one of the efficient producers and a very strong player in the south Indian market, it has positioned itself very well in the market.
Financials
To reduce the power cost over the long run and reduce the dependence on state electricity, the company installed 15mw captive thermal power plant running successfully. The company has grown rapidly in the last three years and profits generated were ploughed in to build up capacities. One of the main reasons for the growth in profitability, apart from the increasing demand, is also the increase in the cement prices in India. Financially, the company is becoming stronger and generating higher cash flows every year.
After incurring losses of Rs 7.22 crore in FY2002-03, it generated net profit of Rs 13.96 crore in the subsequent FY2003-04 and continuing an increasing trend, its net profit in FY2006-07 was at Rs 114.71 crore. The company had delivered healthy results in the June quarter FY2007-08. Net sales and net profit were Rs 199.76 crore and Rs 35.13 crore respectively for the same period, delivering growth of 15.07% and 22.62% over the corresponding quarter.
At the same time, operating margins also improved from 33.52% to 36.64% and in FY2006-07 it was 34%.
Valuation
On the valuation front, backward integration is the key for the company and this will stand in good stead for Chettinad. The company?s trailing twelve-month fully diluted earning per share is at Rs 41.15. Its P/E comes to 10.49 times.
The promoters group of the company, Chettinad Software Services (acting in concert) had given an open offer to acquire 13.84% stake, which will bring the promoter holding to 90%.The promoter holding as on June 30, 2007 was 76.16%. The offer price for the acquisition of stake is set at Rs 450 and the offer period has started from August 17, 2007 and will end on September 5, 2007.
?The author does not hold any
investment in the company