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Shree Cem: Margins rise on lower base - Views on News from Equitymaster

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Shree Cem: Margins rise on lower base

Jan 23, 2012

Shree Cement has announced its financial results for the quarter and nine month period ended December 2011. During 3QFY12, the company has reported a rise of 61% YoY and 115% YoY in sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Revenues rise by 61% YoY during the quarter ended December 2011.
  • Operating profits rise by 111% YoY as operating margins improve from 20.2% in 3QFY11 to 26.4% in 3QFY12.
  • The company has reported a rise of 115% YoY in the net profits during the quarter.
  • During 9MFY12, sales and net profits witness a rise of 29% YoY and 6% YoY respectively.

Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 7,796 12,586 61.4% 24,417 31,472 28.9%
Expenditure 6,221 9,261 48.9% 18,520 23,553 27.2%
Operating profit (EBDITA) 1,575 3,324 111.0% 5,897 7,919 34.3%
Operating profit margin (%) 20.2% 26.4%   24.2% 25.2%  
Other income 19 18 -0.8% 442 44 -
Depreciation 1,314 2,351 78.9% 4,108 5,567 35.5%
Interest 204 370 81.7% 643 978 52.3%
Exceptional gains/(losses) (59) (0)   (142) (94)  
Profit before tax 18 622 3371.2% 1,447 1,323 -8.6%
Tax (257) 30   7 (204)  
Profit after tax/(loss) 275 592 115.3% 1,440 1,527 6.1%
Net profit margin (%) 3.5% 4.7%   5.9% 4.9%  
No. of shares (m)       34.8 34.8  
Diluted earnings per share (Rs)*         62.7  
P/E ratio (x)*         35.5  
*trailing twelve month earnings

What has driven performance in 3QFY12?
  • During the quarter ended December 2011, Shree Cement reported a rise of 61.4% YoY in the topline. The rise was on account of 44.9% YoY rise in cement revenues as well as 250.9% YoY increase in power revenues. The company has not announced sales volumes.

  • Operating profits reported 111% YoY rise during the quarter. The apparent improvement at the operating level was on account of the lower base effect. Operating profit margins improved from 20.2% in 3QFY11 to 26.4% in 3QFY12. The power business reported a loss of Rs 1.1 bn at the operating level (EBIT).

  • While other income remained almost flat during the quarter, interest expenses were significantly higher by 81.7% YoY. Depreciation charges were higher by 78.9% YoY on account of commissioning of a power plant.

  • At the bottomline level, deferred tax and MAT credit entitlements kept the effective tax rate as low as 4.9% during the quarter. Net profits increased by 115.3% YoY as net margins increased from 3.5% in 3QFY11 to 4.7% in 3QFY12.

What to expect?
Though the current quarter shows an improvement in year-on-year comparison, it is mainly on account of lower base effect. Overall, the cement industry still continues to reel under the dual negatives of overcapacity and the slowdown in the construction industry.

At the current price of Rs 2,227 the stock is trading at 35.5 times its trailing twelve month earnings. We have a cautious view on the stock from a 2-3 year perspective.

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