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Shree Cement (SRCM)
Cement
Cost inflation continues to be worrisome. Shree Cement’s (SRCM) operating profits
at Rs2.6 bn were marginally ahead of our estimates; however, we continue to remain
concerned of the high fuel prices that have plagued both its cement and power
segments. We continue to maintain our cautious stance on Shree Cement with a
revised target price of Rs1,730/share, aligned to our view on the cement sector and
heightened due to relentless cost pressures from petcoke prices in the case of SRCM.
Operating results in line with estimates, net income dented by higher depreciation
SRCM reported revenues of Rs10.3 bn (9% yoy, -3% qoq), operating profit of Rs2.6 bn (-11%
yoy, -12% qoq) and net income of Rs633 mn (-41% yoy, 42% qoq) against our estimate of Rs10
bn, Rs2.5 bn and Rs703 mn, respectively. Marginal EBITDA beat of 6% was primarily driven by
lower-than-estimated overhead expenses of Rs886 mn against our estimate of Rs1 bn. Sales
volumes at 2.7 mn tons were marginally ahead of our estimates though offset by lower
realizations of Rs3,405/ton. An aggressive depreciation charge was only partially offset by deferred
tax credit leading to net income missing estimates by ~10%. Reported net income of Rs550 mn
was further dented by exceptional write-off of Rs83 mn. We discuss key operational details of the
result in a subsequent section.
Fuel costs continue to weigh on profitability of cement and power segments
SRCM’s power and fuel cost continued to weigh on profitability with overall power segment
reporting a negative contribution (EBIT level) despite improved realizations. We note the prices of
imported coal and pet coke have largely sustained the firm pricing trend over the past few
quarters, putting at risk the earnings viability of the power business with prices in the short-term
power market not sustaining historical premium. SRCM’s dependence on imported coal/petcoke
gets further exacerbated due to a worsening demand-supply in its core cement business. We see
limited respite for SRCM from pet coke prices given that the alternate fuel (imported coal)
continues to sustain at US$120/ton levels.
Maintain REDUCE with a revised target price of Rs1,730/share
We maintain our REDUCE rating with a revised target price of Rs1,730/share (previously
Rs2,000/share) as we adjust for power and fuel cost sustaining at higher prices of pet coke and
imported coal. In our view, relentless cost pressures from surging pet coke prices along with
challenging operating environment in cement business as well as merchant power market will
likely continue to weigh on earnings in the near term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Cement (SRCM)
Cement
Cost inflation continues to be worrisome. Shree Cement’s (SRCM) operating profits
at Rs2.6 bn were marginally ahead of our estimates; however, we continue to remain
concerned of the high fuel prices that have plagued both its cement and power
segments. We continue to maintain our cautious stance on Shree Cement with a
revised target price of Rs1,730/share, aligned to our view on the cement sector and
heightened due to relentless cost pressures from petcoke prices in the case of SRCM.
Operating results in line with estimates, net income dented by higher depreciation
SRCM reported revenues of Rs10.3 bn (9% yoy, -3% qoq), operating profit of Rs2.6 bn (-11%
yoy, -12% qoq) and net income of Rs633 mn (-41% yoy, 42% qoq) against our estimate of Rs10
bn, Rs2.5 bn and Rs703 mn, respectively. Marginal EBITDA beat of 6% was primarily driven by
lower-than-estimated overhead expenses of Rs886 mn against our estimate of Rs1 bn. Sales
volumes at 2.7 mn tons were marginally ahead of our estimates though offset by lower
realizations of Rs3,405/ton. An aggressive depreciation charge was only partially offset by deferred
tax credit leading to net income missing estimates by ~10%. Reported net income of Rs550 mn
was further dented by exceptional write-off of Rs83 mn. We discuss key operational details of the
result in a subsequent section.
Fuel costs continue to weigh on profitability of cement and power segments
SRCM’s power and fuel cost continued to weigh on profitability with overall power segment
reporting a negative contribution (EBIT level) despite improved realizations. We note the prices of
imported coal and pet coke have largely sustained the firm pricing trend over the past few
quarters, putting at risk the earnings viability of the power business with prices in the short-term
power market not sustaining historical premium. SRCM’s dependence on imported coal/petcoke
gets further exacerbated due to a worsening demand-supply in its core cement business. We see
limited respite for SRCM from pet coke prices given that the alternate fuel (imported coal)
continues to sustain at US$120/ton levels.
Maintain REDUCE with a revised target price of Rs1,730/share
We maintain our REDUCE rating with a revised target price of Rs1,730/share (previously
Rs2,000/share) as we adjust for power and fuel cost sustaining at higher prices of pet coke and
imported coal. In our view, relentless cost pressures from surging pet coke prices along with
challenging operating environment in cement business as well as merchant power market will
likely continue to weigh on earnings in the near term.
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