SHREE CEMENT (SRCM IN) BUY- Ambit

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SHREE CEMENT (SRCM IN) BUY
We have factored in 5% cement sales volume growth in FY12 and FY13 while we
expect realisation growth to remain muted in FY12. Additionally, we have
accounted for cost pressure in FY12 on account of a surge in pet coke and fuel
prices. In the Power business, we expect timely commissioning of the 300MW of
thermal power plants during 1HFY12 to boost power sales volume in FY12-13. We
have factored in lower power realisation in line with expected realisation in the
northern markets while generation cost is expected to remain firm.
Increased contribution from the Power business during F12-13 should help
cushion the lower profits from the cement business. We estimate operating margin
to contract by 320bps YoY in FY12 and to increase by 340bps in FY13.
Our DCF-based valuation implies a fair value of Rs2,064/share for the stock. The
fair value discounts FY12E and FY13E EBITDA 8x and 6x respectively and implies a
replacement cost of US$74/mt for the cement business.