"Despite disappointing cement dispatch growth, Shree Cement posted excellent bottom-line growth driven primarily by decent growth in cement realization, excellent growth in the power business and lower depreciation and tax outgo during Q3FY13 (Quarter ended March 2013).
The cement volumes fell 4 percent to 3.22 mn tonnes during the quarter, while the power volumes rose 68 percent to 722 mn units. But 3.5 percent Y-o-Y improvement in cement realization helped the total revenue to come in 7 percent higher Y-o-Y to Rs 14.72 bn. The cement realization during the quarter improved to Rs 3677 per tonne as compared to Rs 3552 per tonnes during the corresponding quarter of the previous year. Coupled with improvement in realization, fall in operating costs helped margin expansion by 144 bps to 28.6 percent during the quarter under review.
The good news is that the power division is doing exceedingly well, while the cement realization has improved despite poor demand. But the fact that the cement demand has remained poor despite the quarter being the peak season for cement consumption in the northern markets where the company operates is a major concern. The continuation of such scenario may result in steep price correction going ahead, although the company expects the cement demand and price to increase by 10 percent and 5 percent respectively in the next fiscal. Lower PET Coke prices and sharp fall in coal prices helped the company to lower its fuel expenses and that in turn helped the EBIDTA margins during Q3FY13 expand 144 bps Y-o- Y to 28.6 percent. As a percentage of net adjusted sales the power & fuel expenses contracted 215 bps to 24.1 percent, while the freight expenses fell 160 bps to 16.3 percent although the personnel expenses and other operating expenses increased marginally.
The company has been following accelerated depreciation on certain assets for some time now and that caused the depreciation allowance this time to be very low. It came in at Rs 1.27 bn (46 percent lower Y-o-Y), while the tax expenses also came in 69 percent lower Y-o-Y at Rs 176 mn thus helping the bottom-line to post 136 percent gain during the quarter to Rs 2.74 bn.
Shree Cement has been aggressively expanding its cement and power capacity during the past several years and the stabilization of the same in the days ahead bodes well for the company. We expect the power business of the company to improve sharply, but the lacklustre growth of the cement segment is a major concern. We reckon that if the cement demand remains poor the company would witness price fall in the quarters ahead. We also see cost pressure going ahead driven by higher power & fuel cost and freight expenses. Thus if cement price falls from these levels we see margin pressure going ahead for the company's cement business. Although on the power business of the company we are quiet bullish.
Nevertheless we expect Shree Cement to maintain its market leadership position in the northern region and would rather continue to outgrow the cement industry going ahead. Integrated operations have enabled the company to post significantly higher operating efficiency than its larger peers in India. Despite the relative macro strength of Shree Cement, we reckon that the share price has run ahead of its valuation, hence maintain 'Sell' rating on the stock with a revised target price of Rs 3800 (considering USD 140 per tonne replacement cost to value the cement business)
We expect the company to maintain its cost leadership position in the cement industry, as it witnesses significant ramp-up in its power business. We believe there would be pickup in pre election spending in several states in the next 12 months while the demand supply mismatch would narrow in favor of demand as the capacity expansion slows down. At the current price of Rs 4640, the stock is trading at PE and EV/ EBIDTA of 13.8x and 8x FY14E earnings. While we continue to be positive on Shree Cement operational matrix, we are a bit worried about the cement industry macro at this point as the demand growth continues to remain weak. We believe Shree Cement has run ahead of its valuation even after considering increased cement replacement cost of USD 140 per tonne to value its cement business. We maintain our 'Sell' rating on the stock with a revised one year price target of Rs 3800. We value the cement business at USD 140 per tonnes (in line with current replacement cost of USD 140- 150 per tonne). We value the power business using discounted cash flow (DCF) approach to arrive at per share value of Rs 544. We estimate the revenue and EPS for FY13 to come in at Rs 56.96 bn and Rs 277.8 respectively," says FinQuest Securities research report.
Non-Institutions holding more than 90% in Indian cos
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