Shree Cement - Positives factored in; Hold - Anand Rathi

We expect Shree Cement's (Shree) revenue/EBITDA in 2QFY13 to dip 2%/9% yoy. PAT, however, is expected to rise by over 110% yoy due to 60% less depreciation. Work on new clinker plants (Rajasthan) and preproject work (Bihar and Chhattisgarh) are underway. Fundamental positives: foothold in high-utilisation markets, robust capacity expansion, low gearing and sturdy RoE. Headwinds: regional concentration and high valuations. Hold.

- Dispatch growth subdued. Dispatches in 2QFY13 are likely to be flat yoy (down 7% qoq) to 2.83m tons, largely due to less demand in the North. Average realisation is expected to dip 1% yoy (and 4% qoq) to Rs.3,740 a ton. Accordingly, revenue is estimated to drop 2% yoy (and 7% qoq).

- EBITDA to dip 9% yoy; PAT up +110%. EBITDA is expected to drop 9% yoy (and 20% qoq) due to cost pressures. We estimate EBITDA/ton of Rs.985 (against Rs.1,180 in the previous quarter and Rs.1,155 in the year-ago quarter). PAT is expected to rise +110% yoy due to a 60% dip in depreciation.

- Expansion updates. Orders have been placed for two clinker units (Line IX and X) of 2m tons each at Ras (Rajasthan) given sufficient land and limestone reserves. The locations of the grinding units are being finalised. Also being set up are a grinding unit in Bihar and a clinker-cumgrinding unit in Chhattisgarh, for which pre-project work is underway. We expect ordering in FY13.

- Valuation. We expect Shree to be over 18m-ton company by Jun'14. Its operations in the high utilisation markets of the North and Central regions, capacity expansions, low gearing, strong RoE are fundamental positives. Regional concentration and high valuations are headwinds. At our target of Rs.4,121, the stock would trade at 6x FY14e EV/EBITDA. The target implies a PE of 13x and an EV per ton of US$115. Risks: Pet coke price hike, weak cement prices.

Source : Equity Bulls

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