Shree Cement - Cement Sector Update - Karvy

Industry leading volume CAGR of 10% for next 2 years: Cost efficiency: We factor in ~10% cement & clinker volume CAGR over the next two years as it recently increased its clinker capacity by 2 mn MT and another clinker unit of 2 mn MT is expected year in FY15 along with a split grinding unit of 1.5 mn MT in Bihar. We factor in 5% power sales CAGR as internal power consumption will increase as its cement capacity rises.

Best in class operating margins: With its strong operational efficiency, Shree Cement has consistently delivered the best operating margins in the industry over the last 6-8 quarters and has mostly delivered operating margins ahead of the industry average. Its cost efficiency emanates from its high usage of low-cost pet coke as fuel and better logistics management.

EBITDA CAGR of 12% during FY13-15E: We have marginally trimmed our EBITDA estimates for FY14-15E by 4% to factor in weak cement demand in the northern region currently which should result in a modest EBITDA per MT QoQ recovery by ~Rs160 per MT. As per our channel checks, its power sales during 3QFY14 is expected to be low YoY. These would result in its EBITDA to decline by ~10% QoQ in Dec qtr. Subsequently, we estimate 12% EBITDA CAGR over the next two years.

Valuation & Recommendation: We continue to remain positive on the stock on account of its strong cost leadership as well as distribution strengths reflecting its industry leading margins and return ratios. These should lead to re-rating of its valuation multiples. We maintain our "BUY" recommendation on the stock with a TP of Rs4805 valuing its cement business at 7.5x FY15E EBITDA & power business at 4x its FY15E EBITDA.

Source : Equity Bulls

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