Shree Cement - Operationally in-line results, maintain Buy - Centrum

Shree Cement's Q4FY13 result was in-line with our estimates on operational parameters with EBITDA at Rs3.8bn (vs. est. Rs3.7bn) and OPM at 26.3% (vs. est. 26.4%). Revenue during the quarter was at Rs14.4bn against our estimate of Rs14.1bn primarily due to higher power sales volume of 795mn units (est. 680mn units). However, despite operational results being in-line with our estimates, adjusted profit was at Rs2.8bn (vs. est. Rs1.5bn) due to lower depreciation (Rs1.3bn vs. est. Rs1.95bn) and lower tax rate of 5.3% (vs. est. 20%). Cement demand and realization has recently been under pressure due to slowdown in housing and infrastructure activities. Going forward, we expect cement demand to recover in 2HFY14E, which should help the manufacturers pass on the rise in input cost to consumers. The company aims to double its cement capacity in the next five years with the help of free cash flows. It has industry leading op. margin in the cement business (op. margin of 25.9% in Q4FY13) and power business' profitability has also improved in recent quarters. Though we have reduced our EPS estimates by 3.6%/3.7% for FY14E/FY15E considering low realization during the quarter, we prefer the stock due to its lean cost-structure, ability to generate free cash flow and consistent improvement in power business' profitability. We maintain Buy rating on the stock with a one year price target of Rs4,879 (earlier: Rs5,109).

Decline in cement segment's revenue and higher depreciation impact profits: Revenue of the company declined 1% YoY to Rs14.4bn led by 11% YoY decline in cement segment's revenue. Revenue from the power segment increased 78.2% YoY to Rs3.1bn. Led by 33.9% decline in op. profit from the cement business, the company reported 21.1% YoY decline in op. profit to Rs3.8bn and op. margin declined 6.7pp YoY to 26.3%. Depreciation was up 62.8% YoY to Rs1.3bn. Lower op. profit and higher depreciation resulted in 19.1% YoY decline in adj. PAT to Rs2.8bn.

Cement segment's profitability impacted due to lower volume and realization: Revenue from the cement segment declined 11% YoY to Rs11.4bn driven by 6% YoY decline in sales volume to 3.2mt and 5.3% YoY decline in blended realization to Rs3,602/tonne. Operating cost/tonne increased 7.7% YoY to Rs2,668/tonne due to increase in raw material, freight, employee and energy costs. OPM of the cement segment declined 8.9pp YoY to 25.9%. EBITDA/tonne was at Rs934 against Rs1,326/tonne in Q5FY12.

Higher sales volume leads to improvement in power segment's performance: Revenue from the power segment increased 144.4% YoY to Rs3.1bn led by 78.2% YoY increase in sales volume to 795mn units. Realization was down 12.6% YoY to Rs3.9/unit. EBITDA/unit of power was at Rs1.06/unit against 0.87/unit in Q5FY12.

EPS estimates revised: We have revised realization estimates downwards by 2%/1.3% each to Rs3,835/Rs4,148/tonne for FY14E/FY15E considering the weak pricing trend. We have revised depreciation assumption downwards by 0.3%/1.1% for FY14E/FY15E. Considering these changes EPS stands revised downwards by 3.6%/3.7% to Rs293.9/Rs365.9 for FY14E/FY15E.

Maintain Buy: At the CMP, the stock trades at 11.8x FY15E EPS, 5.9x EV/EBITDA, and EV/tonne of US$134.1 (considering cement business only). We maintain Buy rating on the stock with a one-year price target of Rs4,879 (earlier Rs5,109). We have valued cement business at 7x FY15E EBITDA and power business at 0.8x BV

Source : Equity Bulls

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