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Shree Cement (SRCM)
Cement
Cement bucks the industry trend, power has no such luck. Shree Cement (SRCM)
surprisingly bucked the industry trend of a sequential decline in realizations, allowing
for a beat in operating profits at Rs2 bn in comparison to our estimate of Rs1.5 bn. The
power business, though continues to struggle with the high cost of fuel not allowing
SRCM to compete in the open markets, with external sale a negligible 7 MU (-97%
qoq, -86% yoy). We continue to maintain our REDUCE rating with a revised target price
Rs1,850 (Rs1,730 previously), as dependence on pet coke or imported coal will likely
continue to keep a check on margins making the power assets less competitive for
merchant sale.
Cement business drives operational outperformance
SRCM reported revenues of Rs8.5 bn (19% yoy, -17% qoq), operating profit of Rs2 bn (40% yoy,
-23% qoq) and net income of Rs244 mn (36% yoy, -61% qoq) against our estimate of Rs8.6 bn,
Rs1.5 bn and Rs187 mn, respectively. Operational outperformance was driven by cement business
yielding higher-than-estimated realizations of Rs3,412/ton against our estimate of 3,085/ton.
While PBT was dented by higher depreciation, MAT credit (Rs129 mn) and deferred tax assets
(Rs32 mn) led to the net income beat. Reported PAT of Rs385 mn includes Rs185 mn of priorperiod
tax write back and Rs11 mn of asset write-off.
Minimal external sale of power during the quarter
We note that SRCM sold just 6.8 MU in 2QFY12 as against 50 MU in 2QFY11. In our view, sharp
dip in external sale could be attributed to subdued demand for power from state distribution
utilities on account of higher availibility of hydro power during the quarter as well as SRCM’s
inability to compete with low cost generating assets.
Cement realizations surprise, pet coke prices show some signs of cooling
SRCM’s average realizations remained flat sequentially at Rs3,412/ton which in our view is
surprising given the pricing weakness during the monsoon months. We note that average cement
prices in North India (SRCM’s key market) came down by ~Rs20/bag in 2QFY12. We are however
encouraged by some stabilization in power and fuel cost as prices of both pet coke and imported
coal show some signs of moderation (see Exhibits 7, 8 and 9).
Maintain REDUCE with a revised target price of Rs1,850/share
We maintain our REDUCE rating with a revised target price of Rs1,850/share (previously
Rs1,730/share) as we lower our assumption for power and fuel cost and improve our cement
realization in accordance with reported results.
We have revised our EPS estimates to Rs76/share in FY2012E (previously Rs83/share) and to
Rs117/share (previously Rs133/share) primarily adjusting for higher depreciation reported during
the quarter.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shree Cement (SRCM)
Cement
Cement bucks the industry trend, power has no such luck. Shree Cement (SRCM)
surprisingly bucked the industry trend of a sequential decline in realizations, allowing
for a beat in operating profits at Rs2 bn in comparison to our estimate of Rs1.5 bn. The
power business, though continues to struggle with the high cost of fuel not allowing
SRCM to compete in the open markets, with external sale a negligible 7 MU (-97%
qoq, -86% yoy). We continue to maintain our REDUCE rating with a revised target price
Rs1,850 (Rs1,730 previously), as dependence on pet coke or imported coal will likely
continue to keep a check on margins making the power assets less competitive for
merchant sale.
Cement business drives operational outperformance
SRCM reported revenues of Rs8.5 bn (19% yoy, -17% qoq), operating profit of Rs2 bn (40% yoy,
-23% qoq) and net income of Rs244 mn (36% yoy, -61% qoq) against our estimate of Rs8.6 bn,
Rs1.5 bn and Rs187 mn, respectively. Operational outperformance was driven by cement business
yielding higher-than-estimated realizations of Rs3,412/ton against our estimate of 3,085/ton.
While PBT was dented by higher depreciation, MAT credit (Rs129 mn) and deferred tax assets
(Rs32 mn) led to the net income beat. Reported PAT of Rs385 mn includes Rs185 mn of priorperiod
tax write back and Rs11 mn of asset write-off.
Minimal external sale of power during the quarter
We note that SRCM sold just 6.8 MU in 2QFY12 as against 50 MU in 2QFY11. In our view, sharp
dip in external sale could be attributed to subdued demand for power from state distribution
utilities on account of higher availibility of hydro power during the quarter as well as SRCM’s
inability to compete with low cost generating assets.
Cement realizations surprise, pet coke prices show some signs of cooling
SRCM’s average realizations remained flat sequentially at Rs3,412/ton which in our view is
surprising given the pricing weakness during the monsoon months. We note that average cement
prices in North India (SRCM’s key market) came down by ~Rs20/bag in 2QFY12. We are however
encouraged by some stabilization in power and fuel cost as prices of both pet coke and imported
coal show some signs of moderation (see Exhibits 7, 8 and 9).
Maintain REDUCE with a revised target price of Rs1,850/share
We maintain our REDUCE rating with a revised target price of Rs1,850/share (previously
Rs1,730/share) as we lower our assumption for power and fuel cost and improve our cement
realization in accordance with reported results.
We have revised our EPS estimates to Rs76/share in FY2012E (previously Rs83/share) and to
Rs117/share (previously Rs133/share) primarily adjusting for higher depreciation reported during
the quarter.
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