Shree Cement: Margins surprise; upgrade to Buy :Centrum

Margins surprise; upgrade to Buy
Shree Cement’s Q5FY12 result was significantly above our and Bloomberg’s
consensus estimates with EBITDA at Rs4.8bn (vs. est. Rs3.7bn) and EBITDA
margin at 33.1% (vs. est. 25.7%). Higher operating profit of the company was
primarily due to higher sales volume of 3.37mt (vs. est. 3.11mt) and
realization of Rs3,805/tonne (vs. est. Rs3,727/tonne). Higher EBITDA coupled
with lower depreciation (Rs818mn vs. est. Rs1,737mn) and tax rate (8.3% vs.
est. 20%) resulted in profits of Rs3.5bn, significantly above our estimate of
Rs1.4bn. We believe that better realization in its key markets would result in
improvement in profits going forward and hence, we have revised our profit
estimates upwards by 29.1%/32.5% to Rs187.2/Rs264.3 for FY13E/FY14E
respectively. RoE and RoCE of the company are expected to be at 26.4% and
18.5% in FY14E against 13.5% and 4.2% in FY11 respectively. We expect the
company to generate free cash flow of Rs36.9bn over FY11-FY15E and net D/E
is expected to improve to -0.55x in FY14E against 0.18x in FY11. The company
will also benefit from its capacity expansion of 1.8mt in Ras, Rajasthan and
grinding unit of 1.5mt in Bihar (this will provide better access to East
markets). We have revised our rating on the stock to Buy (from Neutral) with a
price target of Rs4,049 (earlier: Rs2,924), upside of 20.1% from its CMP.

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Cement division’s improved performance leads to better results and help
to beat our estimates: Revenue of the company increased 40.7% YoY to
Rs14.6bn (est. Rs14.3bn) led by 39.8% YoY growth of cement segments’
revenues. EBITDA of the company increased 85.7% YoY to Rs4.8bn (est.
Rs3.7bn) led by 88.7% improvement in cement segment’s EBITDA. EBITDA
margin improved 8pp YoY to 33.1% and PAT increased 481% YoY to Rs3.5bn
(est. Rs1.4bn).
Higher realization, sales volume and lower costs led to improved
performance of cement division: Higher cement realization (up 11.8% YoY)
and sales volume (up 25.7% YoY) led to 39.8% YoY growth in cement
segment’s revenue to Rs12.8bn. Operating cost/tonne for the cement division
declined 1.8% YoY to Rs2,479/tonne led by decline in energy, freight and raw
material costs. Higher revenue and cost efficiencies led to 88.7% increase in
cement segment’s operating profit to Rs4.5bn and EBITDA margin improved
9pp YoY to 34.8%. EBITDA/tonne of the cement division improved 50.8% YoY
(and 12% QoQ) to Rs1,326/tonne.
Improvement in op. profit of power segment led by higher volume and
realization: EBITDA from the power segment increased 56.8% YoY to
Rs345mn led by higher realization of Rs4.44/unit (up 4% YoY) and sales of
390mn units (up 63.6% YoY). EBITDA/unit of power was at 0.88/unit against
0.92/unit in Q1FY12.


Earnings estimates revised upwards: We have revised our realization
assumptions for cement by 2.8%/3% and sales volume assumption by 4%/5%
for FY13E/FY14E. Consequently our EPS estimates stand revised upwards by
29.1%/32.5% to Rs187.2/264/3 for FY13E/FY14E.
Upgrade to Buy: At the CMP, the stock trades at 12.8x FY14E EPS, 5.7x
EV/EBITDA, 2.7x P/BV and EV/tonne of US$139.3 (considering cement business
only). We upgrade our rating on the stock to Buy (earlier: Neutral) with a
revised price target of Rs4,049 (earlier Rs2,924), upside of 20.1% from CMP.