Shree Cement: Operating results in-line, maintain Hold : Centrum Research

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Operating results in-line, maintain Hold
Shree Cement’s Q3FY12 results were largely in-line with our estimates with
Revenues at Rs12.6bn, 5.8% above our estimates and EBITDA at Rs3.3bn,
4.1% above our estimates. The company reported EBITDA margin of 26.4%
against our estimates of 26.8%. However, higher depreciation charges
(Rs2.4bn vs. est. Rs1.8bn) due to the commissioning of power plants resulted
in lower-than-estimated profit of RS592mn vs. est. Rs832mn. Though the
company is set to benefit from higher cement prices in its key markets and
lower pet coke price, concerns related to merchant power business still
prevail as the company has not yet entered into long term contracts. We
revise EBITDA estimates upwards by 4.4%/5.8%/2.4% to
Rs11.5bn/Rs13.9bn/Rs14.1bn for FY12E/FY13E/FY14E to factor in higher
realizations during the quarter and lower pet coke price and maintain Hold
rating on the stock with revised price target of Rs2,328 (earlier: Rs2,102).
􀂁 Higher realization and better product-mix lead to improved performance
of cement division: Blended realizations of cement increased 33.2% YoY to
Rs3.797/tonne on the back of a) higher cement price in the North an d Central
markets and b) better product- mix (grey cement sales volume increased
21.5% YoY to 21.8mt and clinker sales declined 85% YoY) during the quarter.
Higher realization and sales volume resulted in 44.9% YoY growth in Cement
segment’s revenue, whereas, EBITDA increased 115.8% YoY to Rs3.2bn.
EBITDA margin of cement segment improved 9.7pp YoY to 29.5% and
EBITDA/tonne increased 98.3% YoY to Rs1,120/tonne.
􀂁 Income form power business improves but margins decline significantly:
Revenue from external power sales increased 3.4x YoY to Rs1.1bn on the back
of 3.5x increase in sales volume to 256mn units. Realization from power
declined 1.7% YoY to Rs4.5/unit. EBITDA from this segment increased 37.4%
YoY whereas EBITDA margin declined 17.3pp YoY to 11.6% due to higher
costs.
􀂁 Significant improvement in margin led by higher realization: EBITDA
margin improved 6.2pp YoY to 26.4% primarily due to steep 33.2% YoY
increase in blended realization. Operating cost of cement division increased
17% YoY (Rs390/tonne) to Rs2,676/tonne led by increase in freight cost,
employee expenses and other expenses.
􀂁 Earnings estimates revised upwards: We revise EBITDA estimates upwards
by 4.4%/5.8%/2.4% to Rs11.5bn/Rs13.9bn/Rs14.1bn for FY12E/FY13E/FY14E to
factor in higher realizations during the quarter and lower pet coke price. Our
EPS estimates for FY12E stands revised downwards by 4.3% to Rs67.9 primarily
due to higher depreciation costs (Rs7.9bn vs. Rs6.8bn earlier) post
commissioning of new power plants.
􀂁 Valuations stretched, maintain Sell: At the CMP, the stock trades at 15.5x
FY13E EPS, 5x EV/EBITDA, 3x P/BV and EV/tonne of US$94.6 (adjusted for the
cement business only). We upgrade our target price on the stock to Rs2,328
from Rs2,102 earlier considering the improvement in realizations and
operating margins due to lower pet coke price and higher realizations. We
maintain Hold rating on the stock and look forward to revise our rating when
clarity on merchant power business emerges.