Shree Cement- Earnings disappoint: Target Price: Rs 1,960:: Emkay

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Shree Cement

Earnings disappoint

ACCUMULATE

CMP: Rs 1,660                                        Target Price: Rs 1,960

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n     APAT at Rs240 mn (-86% yoy) sharply below est -11% decline in cement realisation & 26% decline in power realisation led to 53% drop in EBITDA (Rs1.6 bn vs est of Rs2.3 bn)

n     Revenues (Rs7.8 bn ) down 10% yoy, led by 9.4% decline in cement & 21.8% decline in power revs. Cement prices in Shree’s market hiked by Rs10-15/bag in January

n     Sharp increase in international pet coke prices to increase cost pressure for Shree. Cut earnings for FY11E/FY12E by 23%/31%. Lower TP to Rs1960 to factor earnings downgrade  

n     Valuation at 5.1 EV/EBIDTA and EV/ton at USD 78 (ex value of power) looks attractive post recent prices correction (down 20% in 3M) and factors in lot of negatives. ACCUMULATE 

 Cement revenues down 9.4 % - realisations down 11.3% yoy, 5.3% qoq

Revenues for the quarter at Rs7.79 bn declined 10%yoy, impacted by 9.4% decline in

cement revenues (Rs7.469 bn) and 21.8% decline in revenues from power segment

(Rs335 mn). Though cement volumes grew by 2.1% yoy to 2.62 mnt, realisations at

Rs2851/t (down 11.3% yoy, 5.3%) remained under pressure as Shree’s key markets got

impacted by sluggish cement offtake. This led to lower than anticipated cement

revenues.

Power revenues down 21.8% as realisations decline 26%

Shree’s power revenues at Rs335 mn, down 21.8% yoy, were severely impacted by

lower volumes & sharp decline in merchant power realisations. Power volumes at 74mn

units, grew just up 5.4% yoy, while realization declined by 25.8%yoy to Rs 4.55/unit.

Cost of power/unit increased 47.4% yoy to Rs2.92/unit as pet coke prices increased

~40% yoy to Rs6800/t, leading to EBITDA/unit of just Rs1.63, down 60.7% yoy.

Cost pressures drag EBIDTA down by 53% yoy

On the cost front, P&F cost at Rs708/t increased by 27% yoy – led by increase in pet

coke prices (+40% yoy) while freight cost at Rs770/t increased 14% yoy and 7.1% qoq

due to increase in lead distance & increase in rail freight. The dismal revenue growth,

coupled with cost pressure (total cost/t @ Rs2294/t up 13.7% yoy) dragged aggregate

EBIDTA to Rs1.57 bn (our est- Rs2.3 bn) down by 53% yoy. EBITDA margins at 20.2%

declined by 1851 bps yoy, while EBIDTA/t at Rs556 declined 53.4% yoy & 5.4% qoq.

Sharp increase in interest cost drags APAT down by 85.7%

With commissioning of 3 mtpa grinding capacity in Q4FY10 and 145 MW power plants,

Shree’s depreciation charge jumped 38.7% yoy to Rs1.31 bn. Similarly interest

expenses increased sharply by 337% yoy to Rs504 (Our est Rs300 mn). Consequently

net profit at Rs275mn for the quarter declined by 83.6% yoy. This includes Rs35mn of

Tax write back. Adjusting for this APAT at Rs240 mn declined 85.7% yoy.

Execution on 2x 150 MW TPP on track

Shree’s third phase (first & second phase of 150 mw mentioned earlier), of setting up power

plants with capacity of 300MW (150 MW X2) at a capex of Rs12 bn is on track for

commissioning by June 2011. Post the completion of this project Shree’ total power

capacity will reach to 565 MW, out of this will 115 mw be used for the self consumption and

the rest will be available for sale.

Sharp jump in pet coke prices to impact margins

Average international coal prices have jumped 18% qoq and are currently ruling at

USD120/t while petcoke prices have reached Rs8000/t. These are expected to increase

cost pressures and remains key concern for Shree as it procures 100% of its coal

requirement from international markets.

Cement Prices in Shree Key markets hiked by Rs10-15/bag in January

Cement prices in Shree’s key markets have been hiked by rs10-15 in January. However we

continue to believe that sustainability of these prices remains uncertain in medium/long term

as the cement demand growth FY11YTD ~5% has now emerged as bigger concern than

the overcapacity in the system.

Cut FY11/12 earnings by 22.8%/30.7% - cut target to Rs1960

On account lower cement realisations and poor performance of the power segment, we are

downgrading our FY11 earnings by 22.8% (EPS of Rs69.6) and FY12 earnings by 30.7%

(EPS of Rs95.1). To factor in these earnings downgrade we are reducing our target price to

Rs1960 from Rs2330 earlier.

However sharp stock price correction already factors in a lot of negative –

Maintain ACCUMULATE

Though Shree’s earnings growth visibility is clouded by factors like uncertainty on

sustainability of recent cement prices hike, subdued power offtake & realisation, we believe

that valuation at 5.1 EV/EBIDTA and EV/ton at USD 78 (ex value of power) post recent

prices correction (down 20% in 3M) already factors in lot of these issues. We maintain

ACCUMULATE rating on the stock with revised price target of Rs1960.