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Initiation: a diversified business
model
• One of the lowest-cost producers due to operational efficiencies
and a captive power plant
• Move into the power business limits the risks from the cyclical
cement business
• We initiate coverage with an Outperform rating and an SOTPbased
target price of Rs1,851
What's new
We expect operational efficiencies
and the use of a captive power plant
to ensure that Shree’s production
costs remain among the lowest in
the sector over the next few years.
What's the impact
We expect Shree’s volume growth to
be robust this year, led by timely
capacity expansion following flat
volume year-on-year for FY11. We
forecast a volume-growth CAGR of
8.7% over the FY11-14 period,
compared with a 34% CAGR for
FY06-10. For FY11-14 we forecast an
earnings CAGR of 13% (following a
fall of about 65% YoY for FY11), led
by an increase in volume, a rise in
prices, and an improvement in
power revenue.
Although we expect power revenue
to rise as a result of capacity
additions, we believe the EBITDA
margin of the Power division will fall
for FY12 due to declining merchant
tariffs and rising costs. Shree has a
CPP capacity of 260MW, which we
forecast to rise to 560MW by the
end of 2011. The company expects to
sell excess power, amounting to
about 420MW, in the open market
at merchant rates to the state
governments, other utilities, and the
power exchange. Apart from
boosting earnings, we believe the
merchant-power business will
provide cash-flow stability for the
company given that the cement
business is cyclical.
We see the key downside risks to our
forecasts as lower cement demand,
rising petroleum-coke prices, and
lower off-take in the merchantpower
business.
What we recommend
We initiate coverage with an
Outperform (2) rating and six-month
target price of Rs1,851, based on an
FY12E EV/EBITDA multiple of 6.5x
for the cement business, at a discount
to the sector average, and an FY12E
PBR of 1.5x for the power business.
Based on our FY12 forecasts, the
stock is trading currently at a PER of
31x, an EV/EBITDA of 6.4x, and an
EV/t of US$79 (capacity of 13.6mt
and excluding the power business).
How we differ
Our FY12 and FY13 EBITDA
forecasts are respectively 10.1% and
5.4% lower than those of the
Bloomberg consensus, due mainly to
our forecasts for the Power
division’s revenue and EBITDA
margin.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Initiation: a diversified business
model
• One of the lowest-cost producers due to operational efficiencies
and a captive power plant
• Move into the power business limits the risks from the cyclical
cement business
• We initiate coverage with an Outperform rating and an SOTPbased
target price of Rs1,851
What's new
We expect operational efficiencies
and the use of a captive power plant
to ensure that Shree’s production
costs remain among the lowest in
the sector over the next few years.
What's the impact
We expect Shree’s volume growth to
be robust this year, led by timely
capacity expansion following flat
volume year-on-year for FY11. We
forecast a volume-growth CAGR of
8.7% over the FY11-14 period,
compared with a 34% CAGR for
FY06-10. For FY11-14 we forecast an
earnings CAGR of 13% (following a
fall of about 65% YoY for FY11), led
by an increase in volume, a rise in
prices, and an improvement in
power revenue.
Although we expect power revenue
to rise as a result of capacity
additions, we believe the EBITDA
margin of the Power division will fall
for FY12 due to declining merchant
tariffs and rising costs. Shree has a
CPP capacity of 260MW, which we
forecast to rise to 560MW by the
end of 2011. The company expects to
sell excess power, amounting to
about 420MW, in the open market
at merchant rates to the state
governments, other utilities, and the
power exchange. Apart from
boosting earnings, we believe the
merchant-power business will
provide cash-flow stability for the
company given that the cement
business is cyclical.
We see the key downside risks to our
forecasts as lower cement demand,
rising petroleum-coke prices, and
lower off-take in the merchantpower
business.
What we recommend
We initiate coverage with an
Outperform (2) rating and six-month
target price of Rs1,851, based on an
FY12E EV/EBITDA multiple of 6.5x
for the cement business, at a discount
to the sector average, and an FY12E
PBR of 1.5x for the power business.
Based on our FY12 forecasts, the
stock is trading currently at a PER of
31x, an EV/EBITDA of 6.4x, and an
EV/t of US$79 (capacity of 13.6mt
and excluding the power business).
How we differ
Our FY12 and FY13 EBITDA
forecasts are respectively 10.1% and
5.4% lower than those of the
Bloomberg consensus, due mainly to
our forecasts for the Power
division’s revenue and EBITDA
margin.
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