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Shree Cem: Non-operating items boost profits
Jan 22, 2013

Shree Cement has announced its financial results for the quarter ended December 2012. During the quarter, the company has reported a rise of 19% YoY and 267% YoY in sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Revenues rise by 19.4% YoY during the quarter ended December 2012.
  • Operating margins decline by about 170 basis points (1.7%) on account of increase in power and fuel costs.
  • Other income rises by 87.9% during the quarter, while depreciation charges decline by 65.2% YoY.
  • Steady topline growth along with healthy non-operating performance cause net profits to zoom up by 267.4% YoY.

Financial performance snapshot
(Rs m) 2QFY12^ 2QFY13 Change 1HFY12^ 1HFY13 Change
Sales 11,958 14,280 19.4% 20,478 27,518 34.4%
Expenditure 8,637 10,563 22.3% 15,154 19,863 31.1%
Operating profit (EBITDA) 3,320 3,717 11.9% 5,324 7,655 43.8%
Operating profit margin (%) 27.8% 26.0%   26.0% 27.8%  
Other income 172 323 87.9% 376 615 63.8%
Depreciation 2,351 818 -65.2% 3,970 1,760 -55.7%
Interest 520 563 8.4% 988 1,106 12.0%
Exceptional gains/(losses) (0.2) (120)   (12) (129)  
Profit before tax 622 2,539 308.1% 730 5,275 622.5%
Tax 30 365   (247) 819  
Profit after tax/(loss) 592 2,174 267.4% 977 4,456 356.2%
Net profit margin (%) 4.9% 15.2%   4.8% 16.2%  
No. of shares (m)       34.8 34.8  
Diluted earnings per share (Rs)*         261.6  
P/E ratio (x)*         16.9  
*trailing twelve month earnings
^ In 2012, the company switched its financial year ending from March to June.
As such, 2QFY12 refers to the quarter ended December 2011 and 1HFY12 refers to the 6-month period ended December 2011.

What has driven performance in 2QFY13?
  • During the quarter ended December 2012, Shree Cement reported a rise of 19.4% YoY in the topline. While cement revenues rose merely by 3.2% YoY on account of slackness in demand and about 2% YoY fall in cement prices, power revenues (including inter segment revenue) rose by 87.9% YoY.

  • Operating profits reported a rise of 11.9% YoY during the quarter. All major cost heads except power and fuel costs witnessed a decline. Raw material costs, power & fuel costs and freight & other expenses increased by 0.5%, 2.5% and 0.4% respectively (as a percentage of net sales). However, freight & forwarding expenses declined by 1.5% (as a percentage of net sales). Operating margins during the quarter stood at 26%, declining by 170 basis points (1.7%). It must be noted that while the power segment reported a loss of Rs 1,119.1 m at the EBIT level in the corresponding quarter of the previous financial year, the segment reported a profit of Rs 986.1 m during the current quarter.

    Operating Cost break-up
    (Rs m) 2QFY12 2QFY13 Change
    Cost of raw materials 1,090 1,284  
    Change in inventory (193) (148)  
    Total Raw Materials 897 1,136 26.6%
    % of sales 7.5% 8.0%  
    Employee expenses 638 749 17.3%
    % of sales 5.3% 5.2%  
    Power & fuel 3242 4227 30.4%
    % of net sales 27.1% 29.6%  
    Freight & forwarding expenses 2096 2284 9.0%
    % of net sales 17.5% 16.0%  
    Other expenses 1764 2167 22.9%
    % of net sales 14.8% 15.2%  
    Total operating expenses 8,637 10,563 22.3%
    % of net sales 72.2% 74.0%  

  • Other income rose by 87.9% YoY during the quarter. On the other hand, depreciation charges declined by 65.2% YoY.

  • Steady revenue growth, substantial increase in other income and lower depreciation resulted in a strong bottomline growth of 267.4% YoY. Net profit margins during the quarter stood at 15.2% against 4.9% in the previous year's quarter.

What to expect?
Despite the sluggish demand in cement, Shree Cement reported strong performance during the quarter backed by threefold year-on-year jump in power sales (7,863 kilowatt-hours). We expect cement demand to grow at about 8% over the next few years.

At the current prices of Rs 4,430 the stock is trading at 16.9 times its trailing twelve month earnings. We believe that at the current level, the stock is trading at expensive valuations, with little room for significant gains. As such, we reiterate our 'Sell' view on the stock from a 2-3 year perspective.

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