Shree Cement : de-risked Business model: Target Rs 2,575 says ICICI Sec

Shree Cement (SCL) has de-risked its business from earnings cyclicality through
diversifying into power. SCL’s power capacity is expected to rise to 563MW
(including 43MW waste heat recovery) by FY12E from 120MW at present and the
company aims for 1,000MW power capacity by ’14. Hence, we believe that most of
the decline in EBITDA from the cement division in FY11E will largely be offset by
rise in EBITDA from power. Even in cement, SCL is a market leader in North India
with better cost efficiencies. SCL will likely generate Rs38bn operating cashflows
versus Rs25bn planned capex over FY11E-13E. Maintain BUY with a revised target
price of Rs2,575 based on 5x average FY12E-13E EV/E for cement, 2x P/B
ascribed to 143MW operational power plants and 1x P/B assigned to the balance
300MW thermal power plants.
􀁦 De-risking from earnings cyclicality. SCL’s power capacity is expected to rise to
563MW by FY12E, of which 110MW will be for captive purposes and 453MW
(including 43MW waste heat recovery) for merchant sale. We estimate SCL to
produce and sell 285mn, 970mn and 1.6bn units of power resulting in revenues of
Rs5.2bn, Rs8.1bn and Rs12.2bn and EBITDA of Rs2.5bn, Rs3.2bn and Rs4.1bn in
FY11E, FY12E and FY13E respectively. Thus, power is likely to form ~23% of
revenues and EBITDA by FY13E from 5% and 7% respectively in FY10.
􀁦 Ramping up cement capacity 50% by December ’10. SCL’s split grinding units of
1.5mnte capacity each at Suratgarh (Rajasthan) and Rourkee (Uttarakhand)
commenced production by February-March ’10 and another 1.5mnte at Jaipur is
expected by December ’10, thus increasing integrated cement capacities 50% to
13.5mnte by December ’10. Also, the company has recently acquired land (~90%
complete) in Karnataka, which would have 5mnte clinker capacity.
􀁦 EPS CAGR of 25% over FY11-13E. We estimate cement volumes to grow 5% to
9.7mnte and clinker volumes to decline 37% to 0.6mnte. We factor in 11% volume
CAGR over FY12E-13E with 11.5mnte and 12.7mnte volumes in FY12E and FY13E
respectively. We expect utilisation in North India to drop to ~81% in FY11E from
90%+ and hence, factor in a 2% realisation drop in FY11E.We have factored in a
Rs1,000 EBITDA/te from cement (EBITDA margin of 30%) in FY11E compared with
Rs1,350/te in FY10.
􀁦 Beawar Power plant with 300MW capacity likely to be complete by June ’11
versus the earlier estimate of December ’11. But no fuel arrangements seems to
have been made yet (SCL intends to import coal and/or participate in e-auctions).