Shree Cement - Result beats estimates; maintain Buy - Centrum

Shree Cement's Q1FY13 result was above our and Bloomberg's consensus estimates with EBITDA at Rs3.9bn (vs. est. Rs3.7bn) and EBITDA margin at 29.7% (vs. est. 29.5%). Higher operating profit of the company was primarily due to higher sales volume of 3.05mt (vs. est. 2.95mt). We have assumed Volume on the basis of management's comments that utilization rate was 90% in the quarter. Higher EBITDA, coupled with lower tax rate (16.5% vs. est. 20%) resulted in profits of Rs2.3bn, 12% above est. Rs2bn. We believe that the company will show improvement in both its key segments (cement and power) going forward. We expect EBITDA/tonne of cement to be Rs1,208 in FY13E against Rs1,009 in FY12. In the power segment, management expects the sales volume to be 1.8-2bn units in FY13E against 1.3bn units in FY12. EBITDA/unit from power segment will be Rs0.85/unit against 0.71/unit in FY12. Cement price in the key market of the company (North region) is up Rs8-10/bag in October '12 (~2% MoM hike), which would benefit the company going forward. The company will also benefit from its capacity expansion of 4mt (2mt each by Q4FY13E and Q4FY14E) in Ras, Rajasthan and grinding unit of 1.5mt in Bihar (better access to East markets, where demand-supply situation is favourable and realization is higher compared to other regions). We maintain Buy on the stock with price target of Rs4,996.

- Higher volume helps cement business to post better numbers and beat our estimates: Revenue of the company increased 54.8% YoY to Rs13.2bn (est. Rs12.6bn) led by 40.1% YoY growth of cement segments' revenues. EBITDA of the company increased 96.1% YoY to Rs3.9bn (est. Rs3.7bn) led by 78.2% growth in cement segment's EBITDA. EBITDA margin improved 6.3pp YoY to 29.7%.

- Higher realization and sales volume led to improved performance of cement division: Higher cement realization (up 13.7% YoY) and sales volume (up 23.1% YoY) led to 40.1% YoY growth in cement segment's revenue to Rs11.9bn. Operating cost/tonne for the cement division increased 4.1% YoY to Rs2,704/tonne led by higher fuel costs. Average fuel cost during the quarter was at Rs7,312/tonne against Rs6,908/tonne in Q2FY12. Higher realization and sales volume resulted in 6.5pp YoY improvement in EBITDA margin of the segment to 30.3%. EBITDA/tonne of cement was at Rs1,176 against Rs813 in Q2FY12.

- Sharp increase in power sales led to 33x increase in segment's EBITDA: Led by 45.2x YoY increase in power sales volume and 5.2% YoY increase in realization, revenue from the segment increased 19.8x YoY to Rs1.4bn. EBITDA of the segment increased 33x YoY to Rs330mn and EBITDA margin improved 9.7pp YoY to 24.2%. EBITDA/unit of power was at Rs1.07 against Rs0.61 in Q2FY12.

- Maintain Buy: At the CMP, the stock trades at 12.5x FY14E EPS, 5.9x EV/EBITDA and EV/tonne of US$130.2 (considering cement business only). We maintain Buy on the stock with a price target of Rs4,996, valuing the cement business at 7x mid-FY15E EBITDA and power business at 0.75x P/BV.

Source : Equity Bulls

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