Shree Cement’s reported numbers for their extra quarter of their 15-month
year of FY12, which were better than our expectations on all accounts i.e.
1) surprisingly high implied volume growth of 40%y-y; 2) better
realisations; 3) lower-than-expected costs, especially power & fuel and
freight costs (on per-ton basis) and 4) improvement in power business at
EBITDA level. The better-than-expected operating performance for
cement business was reflected in EBITDA per tonne turning out at INR
1,311 per tonne, up 33%y-y and 31%q-q and significantly ahead of our
estimates of INR 981 per tonne. Bottom line was boosted by much lowerthan-
expected depreciation as well as tax write back, allowing the
company to post a record high profit of INR 3.5bn.
We are surprised at the high volume growth that Shree Cement has
witnessed during the quarter which is leaps and bounds ahead of the
YoY volume growth of 2%-5% reported by the other companies under
our coverage. This especially in an environment of pricing discipline
where companies focus more on pricing at the cost of market share.
With cement prices not witnessing any pressure to correct (even the
normal monsoon correction has been more muted this time round
leaving aside a couple of states) and costs looking much more stable
than they have done in the past two years, profitability of cement
companies in FY13 could move above the mid-cycle range. Our target
price and estimates for Shree Cement are under review.
Cement business – Surprisingly high volume and lower cost
The company’s cement revenue at INR14.5bn (+41% y-y and -2% q-q)
was significantly ahead of our estimates of INR 12.9bn, on account of
higher realisation.
As per the company, cement realisation was at INR 190 per bag (or
INR 3,805 per tonne), up INR 19 per bag q-q, slightly higher than our
expectations of INR 14 per bag. This is the same increase as reported
by other companies under our coverage. Based on these realisations,
the revenue from cement business at INR 12.8bn would imply volume
for the company grew by 40% y-y during the quarter. Volume data for
Apr and May’12, available with us, showed a growth of 28% YoY
which implies that in June volume was up by 43%y-y, which is
extremely surprising to us. June sales volume at 1.2mnT would mean
a capacity utilisation of 89%, in line with peak-period utilization.
On the cost front as well, there was a positive surprise as total cost per
tonne at INR 2,494 turned out to be 9% lower than our estimates,
benefitting from higher operating leverage as well as lower power &
fuel costs and freight cost per tonne.
Power and fuel cost at INR 616/ton (-10% y-y and +7% q-q) were
significantly lower than our estimates of INR 700/ton. We had
expected higher power and fuel cost, led by a increase of 15% in
international pet coke prices in the Jun’12 quarter along with a 11%
depreciation in the INR vs. the USD.
Shree’s freight cost declined on both y-y and q-q basis to INR 699/ton
despite a ~20% increase in railway freight in March12. Based on the
company’s freight mix (Road: rail: 75:25), we has expected an
increase of nearly INR 30 per tonne in freight cost from the previous
quarter (at INR 710/ton).
On account of surprisingly higher volumes and lower cost, EBITDA/ton
at INR 1,311 per ton (+33%y-y & 31%q-q) beat our estimates by 34%.
Power business – Improvement in EBITDA/unit; new PPA could be
at a lower realisation
For the power business, sales at 390mn units, down 10% sequentially,
was lower than our expectations (~450mn units) as we had expected
higher offtake in merchant power sales on the back of commissioning
of its second 150MW power plant. Realisation at INR 4.3 per unit was
in line, but EBITDA per unit improved to INR 0.9 per unit (vs. 0.5 per
unit in 4QFY12), benefiting from lower reported pet coke prices, in our
view. We believe there is some downside risk to our merchant power
sales estimates as there is a lack of clarity as far as future power sales
are concerned given that its short-term power purchase agreement
(PPA) with state electricity boards expired in Jun 12. The company
has not yet announced any further tie-ups for power sales but
suggested that a new contract is in the works and could be at an 8%
lower realisation than the current one.
Bottom-line: Record profit; helped by much lower depreciation &
tax rate
On account of better-than-expected performance of both cement and
power business, EBITDA at INR 4.8bn (+86%y-y & 29%q-q) turned out
53% and 24% higher than our as well as consensus estimates,
respectively.
Due to better operating performance coupled with lower depreciation
and tax write back, the company reported record quarterly profit of
INR 3.5bn (+540%y-y & 207%q-q). In the past, the company has
exhibited significant volatility in depreciation due to accelerated
depreciation on commissioning of new plants.
Depreciation was nearly INR 1.5bn lower from the previous quarter and
was the lowest in the last three years. The company has guided for
INR5 bn of depreciation during FY13.
There was a tax write back of INR 0.6bn on previous year tax provisions
which resulted in an extremely low tax rate of 8%. Historically, the
company’s tax rate has been very volatile and difficult to predict.
No comments:
Post a Comment