Shree Cement ::Centrum

Lower energy cost helps beat margin estimates
Shree Cement’s Q3FY13 result was above our estimate on op. parameters
(OPM at 27.8% vs. est. 24.7%) despite 2.5% QoQ decline in realization (vs. est.
increase of 2% QoQ) led by steep decline in energy cost. Decline in energy
cost was led by Rs502/tonne QoQ drop in average fuel price to Rs6,378/tonne.
Buoyed by a drop in energy cost, op. profit came at Rs4.1bn (vs. est. Rs3.9bn)
even though revenue at Rs14.6bn was 8.4% below estimated Rs15.9bn.
Higher op. profit coupled with lower tax rate (6% vs. est. 20%) helped the
company post a profit of Rs2.7bn (vs. est. Rs2.3bn). Though, cement price
recently was under pressure due to sluggish demand, we expect demand to
improve in 2HFY14E led by electoral spending (general elections are expected
in May 2014), improvement in capex activities of industries and higher
demand from the housing segment (due to our expectation of a decline in
interest rate). The company aims to double its cement capacity in the next five
years with the help of free cash flows. With net cash of Rs30bn (including
liquid investments) at the end of June ‘12, we expect the company to
generate free cash flow of Rs12.6bn (after factoring in capex of Rs27.5bn)
over FY13-15E. It has industry leading op. margin in the cement business (op.
margin of 28.7% in Q3FY13) and power business’ profitability has also
improved in the last two quarters. We maintain Buy rating on the stock with a
one year price target of Rs5,109 (earlier: Rs5,094).
 Higher revenue from power business leads to better performance: Revenue of
the company increased 5.9% YoY to Rs14.6bn led by 54.2% YoY growth of power
segments’ revenues. Revenue from the cement business was down 0.5% YoY to
Rs11.8bn. Led by 144.2% growth in op. profit from the power business, the
company reported 8.7% YoY growth in op. profit to Rs4.1bn and op. margin
improved 72bps YoY to 27.8%.
 Higher op. profit and lower depreciation and tax rate result in better profits:
Depreciation cost declined 46.1% YoY to Rs1.3bn. Tax rate was at 6% against 33%
in Q4FY12. Led by higher op. profit and lower depreciation and tax rate, profit
increased 136% YoY to Rs2.7bn.

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 Higher sales volume leads to improvement in power segment’s performance:
EBITDA from the power segment increased 144.4% YoY to Rs660mn led by 67.9%
YoY increase in sales volume to 722mn units. Realization was down 8.2% YoY to
Rs4/unit. EBITDA/unit of power was at 0.91/unit against 0.63/unit in Q4FY12.
 EPS estimates revised: We have revised realization estimates downwards by
3%/1% to Rs3,762/Rs3,969/tonne for FY13E/FY14E. We have revised depreciation
assumption downwards by 17.8%/1.8% for FY13E/FY14E and tax rate assumption
to 17% (from 20% for FY13E) and 21% (from 25% for FY14E). Considering these
changes EPS stands revised upwards by 5.5% to Rs267.8 for FY13E. However, EPS
for FY14E has been revised downwards to Rs306 (earlier: Rs325).
 Maintain Buy: At the CMP, the stock trades at 14.5x FY14E EPS, 7.1x EV/EBITDA,
and EV/tonne of US$142.8 (considering cement business only). We maintain Buy
rating on the stock with a one-year price target of Rs5,109 (earlier Rs5,094).