Shree Cement Limited - Well placed to capitalise on growth opportunities - Antique

One of the better regional plays: Shree Cement Ltd. (SCL) has an operational capacity of 13.5mmt, with manufacturing plants located in the northern region. Despite being a regional play, SCL has one of the highest EBIDTA/mt in the industry as the same is aided by operational efficiencies, judicious fuel mix and captively meeting the power requirements.

Surplus power capacities: SCL has a total power capacity of 560MW, of which ~160MW is used for captive power consumption and balance for external sales.

Update on expansion plans: SCL is setting up two clinker manufacturing units of 2mmt capacity each at Ras, which are expected to be commissioned by July 2013 and July 2014, respectively. It is also setting up a 1.5mmt grinding unit in Bihar at a cost of INR2.5bn, which would help in gaining a foothold in the eastern region. SCL has spent ~INR4.5bn on acquiring land for its proposed greenfield expansions in Karnataka and Chhattisgarh. Since land acquisition is almost complete, this should smoothen the execution process for the expansion in the future. We expect the company to announce timelines for the above expansions in the next few months.

Healthy balance sheet to smoothen funding: As of December 2012, the company has a very healthy balance sheet with an estimated net cash of ~INR12.5bn. Additionally, future cash flows are expected to be robust given the pricing scenario. This should help the company meet a large part of the funding requirement for its capex from internal accruals.

Railway siding to increase rail mix: It is also setting up a railway siding at its Ras unit (expected commissioning in December 2013), which will help it increase the share of rail transport in the overall transport mix. This would not only entail savings on outward freight but also on transport of clinker to its split grinding units, which is presently done via road. However, the extent of savings would be subject to the availability of the requisite number of wagons.

Valuation & outlook

At the CMP of INR4,765, the stock trades at a PE and EV/EBIDTA of 15.1x and 6.3x, discounting its FY15e numbers. SCL's scale of operations coupled with operational efficiencies would enable it to face challenging times and capitalise on cyclical upswings. We reiterate a BUY on the stock with a target price of INR5,444. We value the cement division at 8x and power division at 4x EBIDTA for FY15e.

Source : Equity Bulls

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