Cement business disappoints, while lower depreciation and tax allowance
helps the bottom-line
Power division witnesses healthy growth while cost savings aids margin
expansion
Maintain 'Sell' rating on Shree Cement with a revised target price of Rs 3800
Despite disappointing cement dispatch growth, Shree Cement posted excellent bottom-line growth driven
primarily by decent growth in cement realization, excellent growth in the power business and lower
depreciation and tax outgo during Q3FY13 (Quarter ended March 2013).
The cement volumes fell 4% to 3.22 mn tonnes during the quarter, while the power volumes rose 68% to
722 mn units. But 3.5% Y-o-Y improvement in cement realization helped the total revenue to come in
7% higher Y-o-Y to Rs 14.72 bn. The cement realization during the quarter improved to Rs 3677 per
tonne as compared to Rs 3552 per tonnes during the corresponding quarter of the previous year. Coupled
with improvement in realization, fall in operating costs helped margin expansion by 144 bps to 28.6%
during the quarter under review.
The good news is that the power division is doing exceedingly well, while the cement realization has
improved despite poor demand. But the fact that the cement demand has remained poor despite the
quarter being the peak season for cement consumption in the northern markets where the company
operates is a major concern. The continuation of such scenario may result in steep price correction going
ahead, although the company expects the cement demand and price to increase by 10% and 5%
respectively in the next fiscal. Lower PET Coke prices and sharp fall in coal prices helped the company to
lower its fuel expenses and that in turn helped the EBIDTA margins during Q3FY13 expand 144 bps Y-o-
Y to 28.6%. As a percentage of net adjusted sales the power & fuel expenses contracted 215 bps to
24.1%, while the freight expenses fell 160 bps to 16.3% although the personnel expenses and other
operating expenses increased marginally.
The company has been following accelerated depreciation on certain assets for some time now and that
caused the depreciation allowance this time to be very low. It came in at Rs 1.27 bn (46% lower Y-o-Y),
while the tax expenses also came in 69% lower Y-o-Y at Rs 176 mn thus helping the bottom-line to post
136% gain during the quarter to Rs 2.74 bn.
Shree Cement has been aggressively expanding its cement and power capacity during the past several
years and the stabilization of the same in the days ahead bodes well for the company. We expect the
power business of the company to improve sharply, but the lacklustre growth of the cement segment is a
major concern. We reckon that if the cement demand remains poor the company would witness price fall
in the quarters ahead. We also see cost pressure going ahead driven by higher power & fuel cost and
freight expenses. Thus if cement price falls from these levels we see margin pressure going ahead for the
company's cement business. Although on the power business of the company we are quiet bullish.
Nevertheless we expect Shree Cement to maintain its market leadership position in the northern region
and would rather continue to outgrow the cement industry going ahead. Integrated operations have
enabled the company to post significantly higher operating efficiency than its larger peers in India.
Despite the relative macro strength of Shree Cement, we reckon that the share price
has run ahead of its valuation, hence maintain 'Sell' rating on the stock with a revised
target price of Rs 3800 (considering USD 140 per tonne replacement cost to value
the cement business)
We expect the company to maintain its cost leadership position in the cement industry, as it witnesses
significant ramp-up in its power business. We believe there would be pickup in pre election spending in
several states in the next 12 months while the demand supply mismatch would narrow in favor of demand
as the capacity expansion slows down. At the current price of Rs 4640, the stock is trading at PE and EV/
EBIDTA of 13.8x and 8x FY14E earnings. While we continue to be positive on Shree Cement operational
matrix, we are a bit worried about the cement industry macro at this point as the demand growth continues
to remain weak. We believe Shree Cement has run ahead of its valuation even after considering increased
cement replacement cost of USD 140 per tonne to value its cement business. We maintain our 'Sell'
rating on the stock with a revised one year price target of Rs 3800. We value the cement business at USD
140 per tonnes (in line with current replacement cost of USD 140- 150 per tonne). We value the power
business using discounted cash flow (DCF) approach to arrive at per share value of Rs 544. We estimate
the revenue and EPS for FY13 to come in at Rs 56.96 bn and Rs 277.8 respectively.
Valuation
Shree Cement is the best in the cement pack when it comes to operational parameters and has
presence in the markets (Rajasthan and NCR) where the demand is fairly strong compared to the other
regions. We continue to believe that Shree cement will outgrow the industry growth, but the volume
growth and realization would come under pressure and would also impact margins as the costs rise.
But we are positive on the company's power business. Nevertheless we expect the company to
maintain its cost leadership position in the cement industry, as it witnesses significant ramp-up in its
power business.
At the current price of Rs 4640, the stock is trading at PE and EV/EBIDTA of 13.8x and 8x FY14E
earnings. While we continue to be positive on Shree Cement's operation matrix we are a bit worried
about the cement industry macro at this point as the demand growth continues to remain weak. We
believe Shree Cement has run ahead of its valuation even after considering increased cement
replacement cost of USD 140 per tonne to value its cement business. We maintain our 'Sell' rating on
the stock with an increased price target of Rs 3800. We value the cement business at USD 140 per
tonnes, while we value the power business using discounted cash flow (DCF) approach to arrive at
per share value of Rs 544. We cite imminent margin pressure due to further fuel price increase,
probable penalty from CCI investigation and limited pricing power for the industry from these levels.
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