Buy Shree Cement - CMP: Rs.4245, TP: Rs.5000 - Prabhudas Lilladher

Strong visibility on volume expansion: Management has guided to increase its cement capacity by 2.5mt/year (first unit in June-2013) over next five years and aim to exit the FY17 with capacity of 25mtpa. Our channel checks suggest ordering of much awaited Chhattisgarh based 3rd unit during the current month. Robust cash flow generation, strong balance sheet (debt free) and exceptional project execution ascribes strong visibility to the consistent volume growth.

Presence in stable and balanced markets: SRCM's entire dispatches come from relatively stable Northern and Central regions. Utilization levels in these regions (including East) are way ahead of the national average as well as threshold levels, coupled with better demand growth and lower capacity addition. Hence, it would benefit SRCM, with strong prices and higher operating rates on expanded volumes.

Structural beneficiary of shrinking domestic coal supplies: SRCM meets its entire fuel requirement through imported coal/pet coke. Coupled with continuous cut in legacy, coal linkages and price increases by Coal India, the availability of cheaper domestic coal under linkage came down significantly to all top producers. Shree Cement would stand as the major beneficiary of this structural shift, given its 100% dependence on imported coal/pet coke.

Valuations attractive, maintain 'BUY': Shree Cement commands one of the best earnings quality in the sector, backed by company's strong command across the aspect of business-cost (ranks 1st), market share (highest market share in northern region @20%), timely volume expansion (5-year CAGR at 15%). At CMP, stock trades at attractive valuations of EV/Tonne at US$88 and EV/EBITDA at 4.9x FY15E. We reiterate our 'BUY' rating with TP of Rs5,000, valued cement biz at EV/EBITDA of 6x FY15E and power biz at P/BV of 0.5x FY15E BV.

Source : Equity Bulls

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