Shree Cement- Double whammy.: Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Shree Cement (SRCM)
Cement
Double whammy. Shree Cement reported weak results as both the cement and power
segments witnessed a sharp deterioration in realizations. Profitability was further
hampered by increase in power and fuel costs on account of firm prices of pet coke.
While we remain cautious on the near-term outlook of the cement sector, we continue
to like Shree Cement on account of reasonable valuations, though highlight that
continued strengthening of fuel cost remains a risk to our estimates.





Cement fumbles, power offers no support
SRCM reported revenues of Rs7.2 bn (-20% yoy, -24% qoq), operating profit of Rs1.4 bn (-65%
yoy, -51% qoq) and net income of Rs180 mn (-94% yoy, -83% qoq) against our estimate of Rs7.7
bn, Rs1.9 bn and Rs308 mn, respectively. Lower-than-estimated revenues were primarily on
account of (1) marginally lower-than-estimated cement realizations at Rs3,033/ton (against our
estimate of Rs3,150/ton) and (2) lower-than-estimated revenues from power business likely on
account of weak short-term rates witnessed in 2QFY11. Inflation in fuel cost (Rs1.8 bn against our
estimate of Rs1.6 bn) was compensated by lower freight cost and other expenses. Reported profit
of Rs105 mn includes asset write-off of Rs74.6 mn.

Cement revenues were Rs6.9 bn on volumes of 2.3 mn tons (in line with our estimates) implying
an average realization of Rs3,033/ton and power revenues were Rs925 mn comprising external
sale of Rs315 mn. SRCM reported negative EBIT of Rs288 mn in its power business likely on
account of higher depreciation and increased fuel cost compounded by the effects of weak
realizations.

Leverage to pet coke and rising fuel cost an area of concern
The recent spike in pet coke prices has raised concerns on the fuel security for SRCM given its
increased dependence on the fuel for the expanded power capacities. Worsening domestic
demand-supply scenario has led to a steady increase in the prices of pet coke over the years along
with increased dependence on imports. We note that SRCM imported ~50% of its total pet coke
requirement in FY2010. Management has indicated that SRCM has the flexibility to switch to coal
(spot purchase) in case the usage of pet coke becomes economically unviable.

Reiterate BUY with a target price of Rs2,400/share
We maintain our BUY rating on SRCM with a target price of Rs2,400/share. Our SOTP-based
valuation includes (1) Rs2,094/share for cement business based on 5.7X FY2012E EBITDA and (2)
Rs313/share for external power sales based on March 2012E based DCF to equity. We note that
CMP implies an EV/EBITDA of 5.3X on adjusted FY2012E cement EBITDA. Our valuations do not
include the proposed 300 MW capacity, which could further add ~Rs170/share to our target price.