Shree Cement BUY Northern advantage:: IIFL

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We recommend BUY on Shree Cement (SCL), as the company
would benefit significantly from likely improvement in
utilisation in northern India (SCL derives ~70% of cement
volume from this region). We expect cement volume growth
to improve on the back of: i) reduction in fight for market
share in the northern region; and ii) margin improvement,
with likely increase in utilisation. We expect 22% Ebitda Cagr
over FY11-14. We expect the power segment’s Ebitda to
improve with new capacity additions; however, per unit
Ebitda may come under pressure, due to increase in
competition. SCL is trading at an attractive FY13ii EV/Ebitda
of 4.2x.
Cement volume growth to improve after remaining flat in
FY11: We expect volume growth to mirror industry growth (after flat
YoY volume growth in FY11), with likely reduction in fight for market
share. We expect 10-11% cement volume growth over FY12-14 on
improvement in the demand-supply scenario in north, higher
utilisation, and replacement of clinker with cement volumes.
Cement margins to improve from 2HFY13: With utilisation in the
northern region likely to increase from 84% in FY12 to 89% in FY13
and 92% in FY14, we expect pricing power in the region to improve
from 2QFY13. We expect SCL’s cement margins to expand 330bps
over FY12-14. We expect the segment to deliver Ebitda Cagr of 22%
over FY11-14.
Power volumes to improve with new capacity additions:
Saleable power capacity would increase from the current 150MW to
450MW in end-FY12. Hence, we expect power volumes to increase
sharply from FY13; however, Ebitda per unit may decline on
increasing competition in the sector. We expect revenue from the
power segment to continue to experience seasonal volatility, which
would lead to less-than-optimum utilisation of the power plants. We
have factored in 60% PLF for the power plants in FY13-14, assuming
no sales in the monsoon season.

SCL valued attractively; BUY: We expect likely improvement in
pricing power in the northern region to boost SCL’s earnings from
2HFY13. We believe that the negatives in the power segment are
largely factored into the share price, and revival in the cement
segment will drive the stock’s performance. We have valued the
stock at one-year forward rolling EV/Ebitda of 5x. Our revised target
price offers 49% upside from the current level.