Shree Cement-Earnings disappoint. Valuations attractive: Emkay

Visit http://indiaer.blogspot.com/ for complete details �� ��

Shree Cement

Earnings disappoint. Valuations remain attractive

ACCUMULATE

CMP: Rs 2,240                                        Target Price: Rs 2,330

---

n     Q2FY11 net profit at Rs106 mn (-96.3% yoy) below estimates EBITDA at Rs1.4 bn (est Rs1.99 bn) decline 65.6% yoy led by lower cement & power realisations and higher RM cost

n     Revenues (Rs7.2 bn ) down 20.2% yoy, led by 20% decline in cement & 27.6% decline in power revs. Cement realizations declined 13.4% & power realisation dipped 38.7% yoy

n     Cut earnings for FY11E/FY12E by 19.1%/6.4%. With recent cement prices hikes and pick up in volumes, expect the worst to be over for Shree

n     Valuation at 5.2 EV/EBIDTA and EV/ton at USD 99 (ex value of power) remain attractive. Maintain ACCUMULATE.   Upgrade target to Rs2330, by rolling over valuation to FY12

Revenue down 20.2 % yoy- 8.1% decline in cement revenues
Revenues for the quarter at Rs7.17 bn declined 20.2%yoy and 24% qoq, impacted by
20% decline in cement revenues and 27.6% decline in revenues from power segment.
Cement volumes declined by 7.6% yoy to 2.27 mnt, as offtake was impacted by lower
demand and severe monsoon across northern region. This coupled with lower
realisations of Rs3010/t, down 13.4% yoy resulted in cement revenues declining
20%yoy to Rs6.86bn (our estimate-Rs7.07bn)

Power segment impacted by lower volumes & realisation
Shree’s powers segment was severely impacted by lower volumes & decline in power
realisations. Power volumes (own generation) declined by 21.4% yoy and 64.7% qoq,
while realization declined by 38.7%yoy and 27.8%qoq to Rs 4.17/unit. Consequently
Power revenues declined by 27.6% yoy to Rs 315 mn (Rs210mn from sale of self
generated power and Rs 105 mn from traded power). Cost of power increased 36.6%
yoy to Rs2.47/unit as pet coke prices increased significantly. However sequentially, cost
declined by 18%, driven by higher share of power generated from waste heat recovery
plant. EBITDA/unit saw decline of 66% yoy and 38.3% qoq to Rs1.7/unit.

Steep increase in power cost drags EBIDTA down by 32%
The dismal revenue growth, coupled with severe cost pressure (total cost/t @ Rs2397/t
up 24.8% yoy , 5.5% qoq) dragged aggregate EBIDTA to Rs1.42 bn (our est- Rs1.99
bn) down by 65.6% yoy. EBITDA margins at 19.9% declined by 2624 bps yoy & 1076
bps qoq, while EBIDTA/t at Rs613 declined 60.6% yoy & 38.9% qoq.

Key cost trends
visible during the quarter were
1) P&F cost @ Rs694/t – up 37.2% yoy – led by increase in pet coke contract rates &
fuel price
2) RM cost @ Rs415/t increased 71.5% yoy – due to higher limestone & fly ash cost
3) Employee cost up 35.7% yoy, Other exp up 12%
4) The only silver lining was the freight cost, which @ Rs721/t (inclusive of clinker
transfer cost) which declined 0.9% yoy, even after increase in diesel prices. The
decline in freight charges is led by lower lead distance



Capex update
Cement capacity to jump to 13.5 mtpa by Q3FY11
The Company has lighted up its Clinker Manufacturing Unit (Unit VIII) of 1 Million tonnes
Per Annum capacity at Bangur City, Ras in Pali Distt of Rajasthan in the month of
September .Also work on 1.5 mtpa grinding unit at Jaipur is progressing as per schedule
and is expected to be completed by Q3FY11. Post this expansion Shree’s cement capacity
will jump to 13.5 mtpa.
Execution on 2x 150 MW TPP on track
Shree’s third phase (first & second phase of 150 mw mentioned earlier), of setting up power
plants with capacity of 300MW (150 MW X2) at a capex of Rs12 bn is on track for
commissioning by June 2011. Post the completion of this project Shree’ total power
capacity will reach to 565 MW, out of this will 115 mw be used for the self consumption and
the rest will be available for sale.

Downgrade FY11E/12E earnings by 19.1%/6.4%
On account lower cement realisation an poor performance of the power segment and lower
realization of grey cement, we are downgrading our FY11 earnings by 19.1% (EPS of
Rs112.3) and FY12 earnings by 6.4% (EPS of Rs165.3).



Expect worst to be over for Shree – Valuation at 5.2 EV/EBIDTA and EV/ton
of USD 99 (ex value of power) remain attractive
As mentioned earlier Shree’s Q2FY10 EBIDTA/t of Rs613 is the lowest level of profitability
since FY2006. With the sector profitability reaching abysmally low levels we have seen
emergence of producers understanding and pricing discipline. With recent price taken by
cement producer across country, we estimate average cement prices in Shree’s key
markets have reached ~Rs225/bag (Rs214/bag in Q2FY11). These hikes coupled with
improving cement volumes are clear signs that the worst is possibly over for Shree as far as
profitability is concerned. Moreover Shree’s current valuation at 5.2 EV/EBIDTA and Ev/ton
of USD 99 (ex value of power) remain attractive. We maintain our ACCUMULATE rating on
the stock. We raise our target price for Shree Cement to Rs2330 (Rs2200 earlier). We have
valued Shree’s cement business at average of USD 100 EV/ton and EV/EBIDTA multiple of
6X for FY12 numbers, which a ~20% discount to our target multiple for ACC. The increase
in our target price is driven by rollover of valuation to FY12 numbers. Power offtake and
realizations remain key factors posing risk to our earnings estimates