BRICS downgrades Shree Cement to Sell on expensive valuations

Impressive results, but valuations are expensive

SCL's results were significantly better than expectations withadjusted PAT at Rs2.92bn vs. our estimate of Rs1.46bn. Topline wasdriven by impressive growth in cement and power generation. Withstrong cement prices and savings in fuel costs, it reported a 763bpsexpansion in EBITDA margins to 33.1%. While results wereimpressive, we expect cement prices to soften and power offtake tocome down in the coming quarter due to monsoons. Its impliedcement valuations of US$166/tonne are expensive. Downgrade toSell from Reduce; raise our target by 8% to Rs2,715.

Turnover driven by cement and power generation: We estimate SCL'scement and clinker volumes have grown 25%. Average cementrealisations saw an impressive 12% yoy growth (about Rs380/tonne qoq,significantly higher than our expectation ofRs130/tonne). Powerrevenues were up 70% yoy mainly driven by an impressive 64% growth ingeneration. However, average merchant realisations were largely flat yoy.Consequently, revenues grew 43% yoy.

Impressive cement realisations and stable costs boost margins:Freight costs/tonne were up 18% yoy, but fuel costs were much lowerthan we foresaw—down about 11% yoy. Cost of power generationremained largely stable yoy. Helped by strong realisation growth andsavings in fuels costs, EBITDA margins rose 763bps to 33%. Depreciationfell 49% as it follows the written-down-value method. Adjusting forRs595mn as prior-period tax refund, coupled with lower-than-expectedeffective tax rate of21%, SCL posted an impressive PAT of Rs2.92bn,up 361% yoy.

Cement expansion: Currently, its unit 9 (1.5mn tonne cement capacity) isin the construction stage and we expect it to be operational by June orJuly 2013.

Outlook and valuation: SCL trades at a residual cement EV/tonne ofUS$166, which is at a significant premium to its replacement cost. While itreported impressive results, weakening cement prices in its key marketsand poor power offtake in monsoons could prevent further stock upside inthe near term. Further, the trend of rising fuel prices may hamper futureperformance. We raise our target by 8% to Rs2,715 valuing the cementbusiness at an EV/tonne of US$120 and downgrade the stock to Sell.

Source : Equity Bulls

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