Shree Cement: Cement business to improve, but merchant power a drag; target price of Rs2,166 (Motilal oswal).

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Shree Cement: Cement business to improve, but merchant power a drag; maintain Neutral
Volume growth
 We expect volume growth to return, after a
muted FY11. Volumes would grow at 10.9%
CAGR over FY11-13 as against 9.9% CAGR
over FY09-11.
 Volume growth is likely to be in line with the
industry, unlike higher than industry average
growth of 33% CAGR over FY06-10.
 We expect capacity utilization to improve
from 77% in FY11 to 85% in FY12 and 95%
in FY13.
Market/business mix
 Shree Cement is a regional player focused
on North India. However, it has been gradually
diversifying into the Central region and now
derives ~72% of its volumes from North India
and 28% from Central India.
 Its incremental market mix is not expected
to change and would be driven by the northern
and central regions, where price increases
have been the highest in 4QFY11.
 Revenue contribution of merchant power is
likely to increase substantially to ~14% in
FY12 and 14% in FY13 (v/s 5% in FY10 and
8.6% in FY11E).
Cost and profitability
 Shree Cement is entirely dependent on pet
coke and imported coal. The recent increase
in domestic coal prices would not have any
impact on its costs or profitability.
 With pick-up in volumes of cement and
merchant power, it would benefit from higher
operating leverage.
 We estimate EBITDA/ton to improve by
Rs380 QoQ in 4QFY11 to Rs939 and by
Rs140 in FY12 to Rs922.

Valuation and view
 Shree Cement's volume growth is likely to
slow down to the industry average over FY11-
13. This coupled with erosion in its superior
profitability due to higher energy cost would
impact valuations.
 Further, it would be susceptible to declining
merchant power tariffs coupled with higher
cost of generation, resulting in pressure on
merchant power profitability.
 The stock is valued at an EV of 5.4x FY12E
EBITDA and US$87/ton (adjusting for power
business). Maintain Neutral, with an SOTPbased
target price of Rs2,166


Shree Cement: Cement business to improve, but merchant power a drag; maintain Neutral
 North-focused market mix augurs well: It
is a regional player focused on North India.
However, it has been gradually diversifying into
Central India. It now derives ~72% of its
volumes from North India and 28% from
Central India. Its incremental market mix is not
expected to change and would be driven by the
northern and central regions, where price
increases have been the highest in 4QFY11. We
estimate ~Rs22/bag QoQ increase in realization
in 4QFY11.
 Volume growth to be in line with the
industry: Shree Cement's volume growth is
likely to fall in line with the industry average, as
against significantly above average growth at
33% CAGR over FY06-10. We expect volume
growth to return after a muted FY11. We
estimate volumes to grow at 10.9% CAGR over
FY11-13.
 Entirely dependent on pet coke/imported
coal: Shree Cement is totally dependent on pet
coke/imported coal for its energy requirement.
It has recently shifted from pet coke to imported
coal for power plants, but continues to use pet
coke in kilns. It is highly susceptible to volatile
imported coal prices, as even domestic pet coke
prices are benchmarked against landed cost of
imported coal.


Shree Cement: Challenges ahead
 Outlook for merchant power challenging:
Outlook for merchant power in India is
challenging given accelerated pace of power
capacity addition. CEA expects capacity addition
of 44.9GW in FY11-12 v/s 41GW over the past
five years. We estimate that merchant capacity
will increase from ~2.5GW in FY10 to 5GW by
the end of FY11. Given the accelerated pace
of capacity addition, merchant tariffs should
correct. For the industry, we factor in tariffs of
Rs4.5/unit in FY11, Rs4/unit in FY12 and Rs3.5/
unit in FY13 (down from Rs5.5/ unit in FY10).
 Merchant power profitability to remain
under pressure: Merchant power contribution
to Shree's revenue is likely to increase
substantially to ~16% in FY12 and 18% in FY13
(v/s 5% in FY10 and 8% in FY11E), driven by
commissioning of 300MW in 2HCY11. We
model a decline in merchant power realizations
from Rs6.6 in FY10 to Rs5 in FY11, to Rs4.4 in
FY12, and to Rs4.3 in FY13. EBITDA/unit
would decline substantially from Rs4.2 in FY10
to Rs1.2 in FY12 and Re1 in FY13.


Shree Cement: Valuation and view
 Shree Cement's volume growth is likely to slow
down to the industry average over FY11-13.
This coupled with erosion in its superior
profitability due to higher energy cost would
impact valuations.
 Further, it would be susceptible to declining
merchant power tariffs coupled with higher cost
of generation, resulting in pressure on merchant
power profitability, especially for its upcoming
300MW capacity.
 The stock is valued at an EV of 5.4x FY12E
EBITDA and US$87/ton (adjusting for power
business). Maintain Neutral, with an SOTPbased
target price of Rs2,166