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Shree Cement: All round growth - Views on News from Equitymaster
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Shree Cement: All round growth
Jan 21, 2010

Performance summary
  • Revenues grow by 30% YoY led by robust across its business segments (cement and power). As cement revenues account for 80% of the revenues, growth has largely been driven by growth in volumes and realisations.
  • Operating profits report nearly 48% YoY as costs grew at a slower pace compared to topline.
  • Profit before tax and extraordinary income grows at a slower rate of 38% YoY on account of higher depreciation and interest costs.
  • Growth at bottomline stands at 35% YoY. Higher tax outgo restricts earnings growth.
  • The board has declared interim dividend of Rs 5 per share.

Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 6,644 8,660 30.3% 19,055 26,881 41.1%
Expenditure 4,375 5,308 21.3% 12,852 15,196 18.2%
Operating profit (EBITDA) 2,269 3,353 47.8% 6,203 11,685 88.4%
EBITDA margin 34.2% 38.7%   32.6% 43.5%  
Other income 85 160 88.1% 346 709 104.7%
Interest 69 115 67.8% 214 182 -15.0%
Depreciation 509 947 86.0% 1,507 2,918 93.6%
Profit before tax/(loss) 1,776 2,451 38.0% 4,828 9,294 92.5%
Extraordinary item 53 14 -72.9% 226 86 -62.2%
Tax 484 762 57.5% 1,179 1,734 47.1%
Profit after tax/(loss) 1,239 1,674 35.1% 3,423 7,475 118.3%
Net margin 18.7% 19.3%   18.0% 27.8%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         282.2  
P/E (times)         7.5  
*trailing twelve month earnings

What has driven performance in 3QFY10?
  • Shree Cement has reported 30% YoY growth in topline during the 3QFY10. The cement business that accounts for little over 80% of the company’s revenue reported 28% YoY growth in volumes. On the other hand growth in power revenues stood at 23.5% YoY.

  • As mentioned above majority of the revenues come from cement business, growth could largely be attributed to the cement division performance. The production volumes were higher 15% YoY. The company has not announced sales volumes. However, we believe that such high level of production numbers must have been achieved to meet the demand for the commodity. The cement industry has reported double digit growth during the nine months ended FY10. Second half of fiscal year being a peak construction season, the demand for the commodity has been robust in 3QFY10. Apart from increase in infrastructural spend, sustained demand from rural housing has supported growth in volumes. In case of Shree Cement, growth in volumes has been robust as it strategically increased penetration in rural regions.

  • Compared to topline, less than proportionate growth in operating costs led to nearly 48% YoY growth in operating profits. The same has also resulted in 4.6% contraction in EBITDA margins. The company been able to lower its cost of consumption of power and fuel costs. One must also note that company has set up captive power plants. Captive power consumption is not only cost effective but the slag generated during the power generation process may also be utilized for cement manufacturing.

  • Segmental break-up of profits before taxes and interest shows that cement division has been little margin pressure. The PBIT margins of the cement division have contracted marginally. On the other hand, PBIT margins of the power division have expanded by 14.5% in 3QFY10, which has cushioned the overall profitability of the company. The growth in PBIT profits of the power division stood at 57% YoY.

  • Profit before tax (PBT) has grown at a slower pace of 38% YoY compared to operating profits on account of higher depreciation and interest costs. This increase in corporate costs is the result of capital expenditure plans outlined by the company. At the net level, growth in profits stood at 35% YoY. Higher tax outgo arrested the growth in earnings. Fall in extraordinary expense and or

What to expect?
The company has outlined capital expenditure in order to maintain market share. The company has strategically ventured into power business which currently contributes over 15% to the topline. Over the next two years the company plans to increase share of power revenues gradually to one third. Over the long run, the company foresees to generate revenues from power business at par with cement. The company considers power as a sustainable business, which would also help insulate cyclicality of the cement business. While these are positives, the rising costs coupled with expected softening of realisations will pressurise margins of the cement division in the medium term.

The company has performed almost in line with our estimates as far as the topline is considered. At the net level, the company is likely to fare better than our expectation on account of its ability to lower power costs and contain growth in interest costs.

We have factored in the company’s decision of venturing into the power business, however cement still remains a major revenue generator. Viewing it as a cement company, we had valued the stock on asset replacement cost basis. At the current price of Rs 2,112, the stock is trading at an enterprise value of nearly Rs 6,000 based on our FY12 estimates, which makes it fairly valued. We had recommended a negative view on the stock as then the valuations left little upside potential. We maintain our cautious view on the cement sector as well as the stock from a medium term perspective.

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Feb 23, 2018 (Close)


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