Shree Cement Ltd — Weak merchant power adds to cement concerns :: BofA Merrill Lynch,

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Shree Cement Ltd — Weak merchant power
adds to cement concerns
Country Overview
Earnings cut on weak merchant power outlook
We have cut Shree’s EBITDA forecasts for FY12-13E by 10-12% due to 1) sharp
cut in merchant power volumes, and 2) lower cement volumes. Our feedback
indicates that slack offtake of the Co’s existing merchant power capacity will likely
lead to push-backs in full-commissioning of its new power capacities though trial
runs are on schedule. The cut in cement volumes is in line with recent demand
disappointment across the industry.
Pressure on cement prices but costs have likely peaked
Cement prices across north India are down sharply versus 1Q FY12 levels.
However, pressure of lower cement prices may be partly offset by lower
international pet coke prices and improved domestic logistics for the same due to
capacity expansions by IOC & HPCL.
1Q results largely in line with expectations
Shree’s 1Q FY12 EBITDA totaled ~Rs2.6bn, down 11-12% both YoY & QoQ. On
a YoY basis earnings were hurt by higher operating costs. On a QoQ basis,
sharply lower merchant power profits were a drag owing to lower power
realizations, lower volumes and higher costs. EBITDA/ton in the cement business
was ~Rs880/ton, down 19% YoY and up 4% QoQ.
Modest valuations support Neutral rating
Shree's cement business trades at an implied EV/capacity valuation of
~US$90/ton i.e. 25-30% discount versus replacement cost. We do not see
downside unless the merchant power business contracts sharply in FY13.