Shree Cement (SRCM) posted better than expected results for 5QFY12. EBITDA was INR4.8b, higher than our
estimate of INR3.9b, driven by strong cement realizations. Lower depreciation and tax further boosted reported
PAT to INR3.5b v/s our estimate of INR1.9b. The company has not disclosed the volume data for 5QFY12; all our
per-ton analysis is based on estimated volumes.
Revenue grew 42.9% YoY (2% QoQ) to INR14.6b v/s our estimate of INR14.9b. Based on estimated volumes of
3.37m tons (up 25.1% YoY), blended realizations improved 6.9% QoQ (11.8% YoY) to INR3,805/ton v/s our
estimate of INR3,611/ton.
Merchant power volumes were ~390m units (excluding traded power) against ~431m units in 4QFY12 and
259m units in 4QFY11. Revenue was INR1.7b against INR1.9b in 4QFY12 and INR1b in 1QFY12. Realizations
were INR4.44/unit against INR4.35/unit in 4QFY12 and INR4.3/unit in 1QFY12.
Cement EBITDA/ton was INR1,324 (v/s our estimate of INR1,093), higher by ~INR184/ton QoQ and INR444/ton
YoY. EBITDA of merchant power business was ~INR350m (v/s our estimate of INR294m), led by higher than
expected EBITDA/unit at INR0.9/unit (v/s INR0.6 in 4QFY12).
The company announced a final dividend of INR8/share. Including interim dividend of INR12/share, total
dividend for the 15-month FY12 works out to INR20/share.
Valuation and view: We are upgrading our normalized EPS by ~17%/16.4% for FY13/FY14 to INR300.7/INR345.2, led
by higher cement realizations. The stock trades at 9.8x FY14E EPS, and at an EV of 4.8x FY14E EBITDA and USD98/ton
(adjusting for Merchant Power assets of ~400MW). Maintain Buy, with revised SOTP-based target price of INR4,193.
Strong cement realizations led strong revenue growth…
Shree's 5QFY12 revenues grew by 42.9%YoY (+2% QoQ) to INR14.6b (v/s est
INR14.9b).
Based on estimated volumes of 3.37mt (+25.1% YoY), blended realizations
improved 6.9% QoQ (+11.8% YoY) to INR3,805/t (v/s est of INR3,611).
In 5QFY12, the company has made changes in accounting policy for revenue booking
in power business by recognizing only the net margin in power trading in revenue
(netted of purchase cost from trading revenue) as against earlier practice of booking
total trading revenue.
With this adjustment, merchant power volumes in 5QFY12 was at ~390m units
(excluding traded power) as against ~431m units in 4QFY12 (v/s 259m unit in 4QFY11)
and revenues of INR1.7b (v/s INR1.9b in 4QFY12 and INR1b in 1QFY12). Realizations
were at INR4.44/unit (v/s INR4.35 in 4QFY12 and INR4.3 in 1QFY12).
…coupled with in-line cost drives profitability
EBITDA grew by 86% YoY (+14% QoQ) to INR4.8b (v/s est of INR3.9b), translating
into EBITDA margins of 33.1% (v/s est 26%) - an uptick of 7.7pp YoY (+5.5pp QoQ).
Lower depreciation and tax further boosted reported PAT to INR3.5b (v/s est of
INR1.9b). Sharp QoQ decline in depreciation is attributable to lumpiness owing to
accelerated WDV method of accounting where Shree has recognized significant
deprecation from its recently commenced power plant over 3/4QFY12.
Cement EBITDA/ton was at INR1,324/ton (v/s est INR1,093/ton), was higher by
~INR184/ton QoQ (+INR444/ton YoY).
The strong profitability is driven by in-line cost push (increase of +INR61/t QoQ
v/s est of INR98/t) which diluted benefit of uptick in realizations (increase of
+INR245/t QoQ). We believe the stabilizations of cost factors reflects softening in
imported fuel prices and pet coke prices (INR6,700/t in 5QFY12, down 14%YoY
from INR7,761/t in 1QFY12).
EBITDA of merchant power business was ~INR350m (v/s est INR294m), led by
better than expected EBITDA/unit at INR0.9/unit (v/s INR0.6 in 4QFY12).
Improvement in merchant power profitability is also reflection of softening in
imported coal prices as it currently uses imported coal in power plants.
Upgrading estimates
We are upgrading our normal. EPS by ~17%/16.4% for FY13/FY14 to INR300.7/
INR345.2 respectively, led by INR12/bag (v/s earlier est of INR4/bag) higher
realizations in FY13 and INR10/bag (no change) increase in FY14
We model in cement volumes growth of 7% in FY13 to 13MT and 7.2% in FY14 to
14mt (unchanged).
These translate into 20% upward revision in target price to INR4,193.
Valuation and view
Shree's cement has witnessed return of superior profitability, with EBITDA/ton of
INR1,219/ton in FY13 v/s MOSL Cement Universe average of INR1,057/ton.
It is well placed for next leg of growth in cement business with strong balance
sheet (net cash of INR13b as of Jun-12). It is expanding capacity at its Rajasthan
plant by ~1.6mt which would be operational by 4QFY13 (Jun-13).
The stock trades at 9.8x FY14E EPS, 4.8x EV/EBITDA and USD98/ton (adjusting for
Merchant Power assets of ~400MW). Maintain Buy with revised target price of
INR4,193 (SOTP based).
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