Shree Cement (SRCM): Where is the value?  ::HSBC Research

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Shree Cement (SRCM):
Where is the value?
 Good cement assets, but difficult pricing/cost environment to limit
EBITDA growth to just c6% over FY11-13e
 Consolidated EBITDA to rise following merchant power
commissioning, but without captive coal; we are not too excited
 Initiate with N and a TP of INR1,840


A North-based player; well-managed assets
SRCM sells c70% of its cement volumes in the
North – a region that, we believe, will continue to
witness excess capacity growth till CY13.
Whereas pricing discipline might ensure prices
will not likely dive off the cliff, capacity
utilisation levels for SRCM will continue to be
tepid. In addition, we note that the operating costs
of SRCM are among the lowest in the sector.
Without captive coal, merchant power not as
interesting
SRCM’s diversification in merchant power fails to
enthuse us as we are concerned about rising coal
prices delivering unattractive returns on the
invested capital of these assets. We value SRCM’s
IPP business at INR10.8bn or INR312/sh.
Standalone EBITDA to grow c6% over FY11-13e
We forecast EBITDA to grow just c6.0% over
FY11-13 as (1) EBITDA margin corrects
following higher costs, and (2) asset turns reduce
in the initial years as new capacity does not
immediately start producing. However, we expect
consolidated EBITDA to grow at c18% CAGR
over the same period as its merchant power
capacity comes online.
Consolidated EBITDA growth is faster; but
stock reflects that. Initiate with N and TP of
INR1,840
SRCM has corrected 15.4% year till date (5 July
2011), underperforming the broader market by
c10%. We believe the stock currently adequately
discounts the expected upside in consolidated
EBITDA growth; initiate with Neutral and a TP
of INR1,840.
Risks
Upside risks: Greater-than-expected improvement
in cement prices and quicker-than-expected
commissioning of the power plant.
Downside risks: Rising cost of raw materials and
uncertainties regarding adequate coal supply for
the power plant.