Shree Cement - Strong show; Valuations remain expensive - Q4FY20 Result Review - HDFC Securities

We maintain Reduce rating on Shree Cement with TP of Rs 17,900, as valuations remain expensive. We expect Shree's FY21E vol to decline 19% in FY21, as Covid-led lockdown will drive ~45% YoY sales decline in 1H. However, falling energy cost and healthy pricing in the north/central markets should drive margin expansion thus moderating FY21 EBITDA decline. In 4QFY20, while Shree's vol fell 5% YoY, strong pricing and falling energy costs bolstered unitary EBITDA to Rs 1,562/MT (industry best!).

Robust 4QFY20 performance: While Covid-19 led shutdown late-Mar onwards drove 5% YoY cement volume decline, robust pricing in the north/central regions kept NSR buoyed at +9% YoY. This along with slump in its merchant power sales drove 2% revenue decline. Further, falling energy costs drove 3% YoY unitary opex fall. These more than offset weak demand and Shree's unitary EBITDA surged 42% YoY to its all time high of Rs 1,562/MT which is also the industry best. Thus, despite nil EBITDA contribution from merchant power, total EBITDA/PAT grew 27/83% YoY.

FY20 performance overview: Shree's cement vol declined (4% YoY) for the first time in past 18 years, and utilisation dropped to a two-decade low of ~60%. Despite this, robust pricing in the north/central regions, increased trade focus (~80% in FY20), benefits of lower energy cost and lean overheads bolstered its unitary EBITDA in FY20 to Rs 1,458/MT (+46% YoY) - its best ever and highest in the industry. This drove 33/26% EBITDA/PAT growth. Aided by strong profit and working capital reduction, OCF jumped 82% YoY to Rs 37.5bn. Lower capex and QIP proceeds further aided a net cash balance of Rs 41bn vs net debt of Rs 2bn YoY.

Capex and earnings outlook: Shree's SGU expansions in Odisha and Pune (3mnMT each) are expected to be commissioned in 2HFY21 (slightly delayed due to Covid). We expect sales volume to fall 19% in FY21 (driven by sharp ~45% YoY fall in 1H), and 19% YoY recovery in FY22E. Stable pricing and low energy cost, however should boost unitary EBITDA to ~Rs1,560/MT during FY21/22E and moderate FY21 EBITDA decline. We have marginally trimmed EBITDA estimates for FY21/22 by 3/1% respectively.

Maintain REDUCE: We retain Reduce rating on Shree Cement with SOTP based TP of Rs 17,900 (SOTP based: Cement/power businesses at 15/5x FY22E EBITDA, and its UAE subsidiary at 1x BV). Despite ascribing premium valuation, for its superior cost leadership and profitability margin and strong capex management, the stock price offers no upside.

Shares of SHREE CEMENT LTD. was last trading in BSE at Rs.19115.15 as compared to the previous close of Rs. 18901.3. The total number of shares traded during the day was 550 in over 302 trades.

The stock hit an intraday high of Rs. 19220.6 and intraday low of 18451.25. The net turnover during the day was Rs. 10373013.

Source : Equity Bulls

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