Shree Cement Power segment disappoints: Anand Rathi

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Shree Cement
Power segment disappoints, Cement recovery ahead
 2QFY11 results. Shree’s 2QFY11 profit was below Street and our
estimates, mainly owing to lower profitability from the cement and
power business. Our FY11 estimates are under review. Maintain Buy.


 Realizations declined 13% yoy and 10.2% qoq at ~`3,010/ton in
the quarter. Cement aggregate volumes dipped 7.6% yoy and 6.2%
qoq to 2.28m tons. Drop of 28% yoy (76% qoq) in Power revenues
(ex inter-segmental) further impacted the decline in overall revenues.
We expect cement demand and prices to revive in 2HFY11.

 Profitability takes a hit. Shree’s EBITDA stood at `590/ton (down
62% yoy and 43% qoq) compared with `440/ton for UltraTech and
`650/ton for Ambuja. Lower Cement & Power realizations and higher
depreciation led to 94% yoy PAT decline; however, lower interest cost
(down 67% qoq) due to debt repayment, arrested the fall.

 Dismal performance by Power. Sale of power units dipped 67%
qoq (~73m units including traded units) due to lower realizations as
an effect of higher supply from hydro-power projects in the industry.
Power EBITDA was ~`1.2/unit (`1.8/unit qoq; `5/unit yoy). The
company targets commissioning 300MW of power plant capacity in
1QFY12 and 1.5m ton grinding unit in 4QFY11.

 Valuation and risks. Our SOTP-based value is `2,730: `2,150 for
cement at 5x FY12e EV/EBITDA and `580 for power at 1x PBV.
This implies normalized PE of 7x and EV/ton of US$125. At CMP,
the stock trades at EV/ton of ~US$96 (ex Power). Risks: Steep rise
in prices of petcoke, lower-than-expected prices of merchant power.