Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Cement (SRCM)
Cement
Cement, power and pet coke—it takes three to tango. We downgrade Shree
Cement to REDUCE noting continued headwinds on (1) weak cement realizations, (2)
rising prices of pet coke and/or imported coal, and (3) softening price trend in the
merchant power market. We have revised our price target to Rs1,680/share, though
highlight higher-than-estimated softening of pet coke prices and better realizations in
cement and power businesses as a key risk to our call.
Strong cement volumes offset pricing weakness
SRCM reported revenues of Rs7.8 bn (-10% yoy, 9% qoq), operating profit of Rs1.6 bn (-53% yoy,
10% qoq) and net income of Rs334 mn (-80% yoy, 80% qoq) against our estimate of Rs7.7 bn,
Rs1.4 bn and Rs282 mn, respectively. Higher-than-estimated volumes of 2.7 mn tons (our estimate
of 2.3 mn tons) compensated for almost negligible power trading revenues in 3QFY11. Absence of
low-margin power trading revenue also resulted in a 30 bps sequential improvement in operating
margins despite cement prices in key markets of North declining by ~Rs12/bag sequentially and
weak merchant rates throughout the quarter.
Cost-pressures likely to persist in the medium term
The recent spike in pet coke prices has raised concerns on the fuel security for SRCM given its
increased dependence on the fuel (SRCM imported ~50% of its total pet coke requirement in
FY2010). Pet coke prices have already reached Rs7,500/ton (landed cost) and we expect prices to
remain stiff in near-term given the recent surge in prices of imported coal. Although management
has indicated that SRCM has the flexibility to switch to coal (spot purchase) in case the usage of
pet coke becomes economically unviable, we see limited benefit from switching over with prices of
imported coal hovering around ~US$120/ton. Exhibit 3 highlights the sensitivity of our fair value
estimate for SRCM to average pet coke price assumption for FY2012E.
Operating environment challenging, downgrade to REDUCE
We downgrade SRCM to REDUCE with a revised target price of Rs1,680/share as we adjust for (1)
higher pet coke prices, (2) reduced merchant realizations and (3) continued weakness in the
cement business. In our view, weak pricing environment for both cement and power along with
relentless cost pressures from surging pet coke prices will likely weigh down heavily on the stock.
Our SOTP based valuation includes (1) Rs1,396/share for cement business based at 6X FY2012E
EBITDA and (2) Rs280/share for external power sales based on March 2012 based DCF to equity.
We have revised our FY2011E EPS estimate to Rs84/share (previously Rs153/share) and FY2012E
estimates to Rs162/share (previously Rs239/share).
Key assumptions—cement pricing, power realization and pet coke prices
Cement sales: We assume cement realizations to improve marginally, benefitting
from higher quantum of cement sale (and reduced clinker) and improvement in
cement volumes at 11.4 mn tons in FY2012E (+8.6% yoy).
Pet coke: We factor an ~20% reduction in prices of pet coke from average levels of
US$160/ton in FY2011E. Further softening in prices of pet coke remains a key upside
risk. We note that 5% higher pet coke prices in FY2012E could impact our fair value
estimate of SRCM by ~4%.
Power sales: We factor realizations of Rs4.5/kwh for external sales from the power
segment comprising 48% of total net generation of 1,619 MU (+58% yoy) as SRCM
benefits from the first full year of operation of recently commissioned 145 MW of
power capacity. Our estimates do not factor any benefit from commissioning of 300
MW of incremental capacity targeted to be commissioned by end FY2012E.
Key highlights of 3QFY11 results
Higher-that-estimate depreciation and interest were offset by tax refund and positive
deferred tax. Reported net income of Rs275 mn includes Rs59 mn of asset write off.
Cement revenues were Rs7.5 bn on volumes of 2.7 mn tons (4% yoy, 18% qoq)
implying an average realization of Rs2,792/ton.
Total power revenues were Rs860 mn including revenue from external sale of power
was Rs335 mn.
SRCM reported negative EBIT of Rs612 mn in its power business likely on account of
higher depreciation charged to power business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Cement (SRCM)
Cement
Cement, power and pet coke—it takes three to tango. We downgrade Shree
Cement to REDUCE noting continued headwinds on (1) weak cement realizations, (2)
rising prices of pet coke and/or imported coal, and (3) softening price trend in the
merchant power market. We have revised our price target to Rs1,680/share, though
highlight higher-than-estimated softening of pet coke prices and better realizations in
cement and power businesses as a key risk to our call.
Strong cement volumes offset pricing weakness
SRCM reported revenues of Rs7.8 bn (-10% yoy, 9% qoq), operating profit of Rs1.6 bn (-53% yoy,
10% qoq) and net income of Rs334 mn (-80% yoy, 80% qoq) against our estimate of Rs7.7 bn,
Rs1.4 bn and Rs282 mn, respectively. Higher-than-estimated volumes of 2.7 mn tons (our estimate
of 2.3 mn tons) compensated for almost negligible power trading revenues in 3QFY11. Absence of
low-margin power trading revenue also resulted in a 30 bps sequential improvement in operating
margins despite cement prices in key markets of North declining by ~Rs12/bag sequentially and
weak merchant rates throughout the quarter.
Cost-pressures likely to persist in the medium term
The recent spike in pet coke prices has raised concerns on the fuel security for SRCM given its
increased dependence on the fuel (SRCM imported ~50% of its total pet coke requirement in
FY2010). Pet coke prices have already reached Rs7,500/ton (landed cost) and we expect prices to
remain stiff in near-term given the recent surge in prices of imported coal. Although management
has indicated that SRCM has the flexibility to switch to coal (spot purchase) in case the usage of
pet coke becomes economically unviable, we see limited benefit from switching over with prices of
imported coal hovering around ~US$120/ton. Exhibit 3 highlights the sensitivity of our fair value
estimate for SRCM to average pet coke price assumption for FY2012E.
Operating environment challenging, downgrade to REDUCE
We downgrade SRCM to REDUCE with a revised target price of Rs1,680/share as we adjust for (1)
higher pet coke prices, (2) reduced merchant realizations and (3) continued weakness in the
cement business. In our view, weak pricing environment for both cement and power along with
relentless cost pressures from surging pet coke prices will likely weigh down heavily on the stock.
Our SOTP based valuation includes (1) Rs1,396/share for cement business based at 6X FY2012E
EBITDA and (2) Rs280/share for external power sales based on March 2012 based DCF to equity.
We have revised our FY2011E EPS estimate to Rs84/share (previously Rs153/share) and FY2012E
estimates to Rs162/share (previously Rs239/share).
Key assumptions—cement pricing, power realization and pet coke prices
Cement sales: We assume cement realizations to improve marginally, benefitting
from higher quantum of cement sale (and reduced clinker) and improvement in
cement volumes at 11.4 mn tons in FY2012E (+8.6% yoy).
Pet coke: We factor an ~20% reduction in prices of pet coke from average levels of
US$160/ton in FY2011E. Further softening in prices of pet coke remains a key upside
risk. We note that 5% higher pet coke prices in FY2012E could impact our fair value
estimate of SRCM by ~4%.
Power sales: We factor realizations of Rs4.5/kwh for external sales from the power
segment comprising 48% of total net generation of 1,619 MU (+58% yoy) as SRCM
benefits from the first full year of operation of recently commissioned 145 MW of
power capacity. Our estimates do not factor any benefit from commissioning of 300
MW of incremental capacity targeted to be commissioned by end FY2012E.
Key highlights of 3QFY11 results
Higher-that-estimate depreciation and interest were offset by tax refund and positive
deferred tax. Reported net income of Rs275 mn includes Rs59 mn of asset write off.
Cement revenues were Rs7.5 bn on volumes of 2.7 mn tons (4% yoy, 18% qoq)
implying an average realization of Rs2,792/ton.
Total power revenues were Rs860 mn including revenue from external sale of power
was Rs335 mn.
SRCM reported negative EBIT of Rs612 mn in its power business likely on account of
higher depreciation charged to power business.
No comments:
Post a Comment