Pricing weakness weighs Shree Cement ::HDFC Sec, report

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Pricing weakness weighs Shree Cement (SRCM) reported an EBITDA/t of Rs 722/t (flat YoY, -12.3% QoQ) even as volume growth slowed down (3.8 mTPA, 10.9% YoY). Realizations declined as prices were under downward pressure in North (Rs 3,547/t, 3.3% YoY, -3.0% QoQ). Power division reported another profitable quarter (Rs 0.63/kWh, 8.0% YoY, 45.0% QoQ) driven by lower fuel prices and flat realizations (Rs 3.92/kWh, +16.0% YoY, flat QoQ). As per our channel checks and recent interactions with the management, Bihar unit (2.0 mTPA GU in Aurangabad) is ramping up fast and delivering additional volumes. However, the core markets of North remain weak and have witnessed pricing declines even as the peak season (Jan-Mar) sets in. This does not augur well for 3Q, which typically sees a sharp uptick in profitability. Given steep valuations, we remain cautious. Maintain Neutral with a revised TP of Rs 10,358 (10.5x FY17 EV/EBITDA, US$225/t) and seek better entry points.  2QFY15 highlights: Cement profitability was ahead of our expectations (Rs 722 vs est Rs 675) as realizations were better than estimates (Rs 3,547/t vs est Rs 3,491). Freight costs hardened ~4.5% as busy season surcharge kicked in. Power EBITDA too improved as petcoke prices declined, helped by a sharp decline in crude prices.  Outlook and view: Given the continued weakness in pricing in core markets we have cut our EBITDA estimates downwards by ~19%/6% for FY15/16. SRCM is well on track to deliver 23.0 mTPA by FY16 end. However, now new capacity addition has been announced so far in FY15. Further, SRCM is known to be aggressive in ramping up new capacities. Given that Raipur (2 mTPA) and Bulandshahr (2.0 mTPA) will be commissioned by December 2015, FY17-18 may be a period of slow growth. Further, a continued price slump will also weigh on expensive valuations (~13.0x FY16 EV/EBITDA, US$250/t).

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