Margin pressure seen; visibility intact… • Shree Cement :: ICICI Securities

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Margin pressure seen; visibility intact… • Shree Cement’s net profitability for Q2FY15 declined 18.9% YoY mainly due to higher depreciation charge (with respect to commissioning of new plants) coupled with a fall in margins. Healthy power sales growth led to 17.2% YoY growth in topline • Cement revenues grew 14.7% to | 1353.3 crore (volumes up 10.9% YoY to 3.81 MT, realisation was up 3.4% YoY to | 3551/tonne). However, QoQ cement sales revenue declined 4.5% led by a 5% drop in realisations. On the other hand, power segment revenues grew 38.6% YoY to | 191.2 crore led by 20.3% YoY growth in volumes and 15.2% YoY improvement in realisation to | 3.89/unit • While high power & fuel cost led to 71 bps YoY margin contraction, higher depreciation charge (up 74% YoY) with respect to new capacity led to 18.9% YoY fall in net profit during the quarter Healthy expansion plans to fuel future growth Shree Cement would continue to remain ahead of its peers in terms of capacity expansion (to add 5 MT i.e. a third of its capacity over the next two or three years) and operating efficiency leading to better volume growth and higher profitability. The company has commissioned a 2.0 MT grinding unit each in Ras, Rajasthan and Aurangabad, Bihar. Shree Cement has also initiated work on the 2.5 MT integrated unit in Raipur, Chhattisgarh. Further, the company is also setting up a 2.0 MT plant in Uttar Pradesh. We think the management’s proactive approach in costsaving initiatives and significant expansion plans will help it to join the large capacity league sooner than later. Best midcap player in terms of cost efficiency in northern India Shree Cement is one of the low cost producers of cement in India with total cement capacity of 17.5 MT. It has been operating at over ~90% capacity utilisation for the last couple of years with healthy operating margins vs. industry. Its cost efficiency emanates from high usage of alternate fuel (pet coke), logistic advantage and self sufficiency in power with capacity of 560 MW. Due to this, it earns highest EBITDA/tonne in the industry. For FY14, the company generated higher EBITDA/tonne of | 933/tonne vs. industry EBITDA/tonne of | 692/tonne mainly due to an advantage of low cost production and best regional mix. Better demand-supply dynamics to keep utilisation levels healthy in north We expect utilisation of players in the north to stay healthy due to steady growth of capacity addition. While we expect capacity to grow at a CAGR of 6.4% in FY14-17E, we expect demand growth to remain ahead of supply growth (i.e. at 8.7% CAGR over FY15-17E). Shree Cement, being a north player, will likely remain a key beneficiary of the same. Timely commissioning of new capacity remains key value driver Given the upcoming new capacity and healthy demand environment, we expect profitability growth to remain healthy over the next two years. On the back of timely expansion, we expect volume CAGR of 13.2% during JY14-17E to 20.7 MT with healthy realisation growth. Further, a strong balance sheet and better efficiency in terms of cost remains a key positive for this company. However, we believe the stock is currently richly priced at 16.9x FY17E EV/EBITDA and US$225/tonne. Hence we, maintain HOLD rating on the stock with a target price of |11200/share [i.e. at 18.0x FY17E EV/EBITDA, $240/tonne on FY17E capacity (25 MT)].

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 http://content.icicidirect.com/mailimages/IDirect_ShreeCement_Q3FY15.pdf