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Shree Cem: Cement segment profits nosedive - Views on News from Equitymaster
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Shree Cem: Cement segment profits nosedive
Jan 27, 2014

Shree Cement has announced its unaudited financial results for the quarter ended December 2013. The company’s sales and net profits have reported a decline of 6% YoY and 46.9% YoY, respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales decline by 6% YoY during the quarter ended December 2013 (2QFY14) on account of decline in power segment revenues.
  • Operating profits decline by 25.6% YoY owing to increases in most major cost heads barring power and fuel.
  • Operating margins contract from 25.8% in 2QFY13 to 20.5% in 2QFY14.
  • Other income decreases by 63.3% YoY during the quarter.
  • While depreciation charges increase by 41.2% YoY, interest expenses decline by 45% YoY.
  • At the bottomline level, net profits decline by 46.9% YoY during the quarter.
  • Net profit margins decline from 15.5% in 2QFY13 to 8.8% in 2QFY14.

Financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 14,013 13,170 -6.0% 26,977 25,645 -4.9%
Expenditure 10,394 10,476 0.8% 19,456 20,457 5.1%
Operating profit (EBITDA) 3,619 2,694 -25.6% 7,520 5,188 -31.0%
EBITDA margin 25.8% 20.5%   27.9% 20.2%  
Other income 302 111 -63.3% 630 850 35.0%
Depreciation 818 1156 41.2% 1760 2294 30.4%
Interest 563 309 -45.0% 1106 621 -43.8%
Profit before tax & exceptional items 2,539 1,339 -47.3% 5,284 3,122 -40.9%
Exceptional gains/(losses) - (32)   (10) (42) 335.1%
Profit before tax 2,539 1,308 -48.5% 5,275 3,080 -41.6%
Tax 365 153 -58.1% 819 203 -75.2%
Effective tax rate 14.4% 11.7%   15.5% 6.6%  
Profit after tax 2,174 1,155 -46.9% 4,456 2,877 -35.4%
Net profit margin 15.5% 8.8%   16.5% 11.2%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         242.9  
P/E (times)*         18.0  
*trailing twelve month earnings
Note: The company has switched to a June-year ending FY12 onwards. As such, the December quarter is referred to as 2QFY14.

What has driven performance in 2QFY14?
  • During the quarter ended December 2013, Shree Cement reported a decline of 6% YoY in the topline. Cement revenues (89.6% of net sales) rose by 8.4% YoY. However, power revenues (including inter segment revenue) reported a decline of 35.3% YoY.
    Segment-wise revenue and profit before interest and tax
    Cement 2QFY13 2QFY14 Change
    Revenue 10,887 11,802 8.4%
    % of net sales 77.7% 89.6%  
    PBIT 1,832 377 -79.5%
    PBIT margins 16.8% 3.2%  
    Power
    Revenue 4,490 2,907 -35.3%
    % of net sales 32.0% 22.1%  
    PBIT    986 1,126 14.1%
    PBIT margins 22.0% 38.7%  

  • Despite the fall in the topline, operating expenditure increased marginally by 0.8% YoY during the quarter. While power & fuel expenses (23.7% of net sales) declined by 5.9% (as a percentage of net sales); raw material costs (6.9% of net sales), transportation and handling costs (21.3% of net sales), employee expenses (7.7% of net sales) and other expenditure (19.9% of net sales) increased by 0.6%, 5%, 1.9% and 3.3% respectively (as a percentage of net sales).

    Operating Cost break-up
    (Rs m) 2QFY13 2QFY14 Change
    Raw Material Consumption 989 1,153  
    Change in Inventory (164) (243)  
    Total Raw Material Cost 825 910 10.3%
    % of net sales 6.3% 6.9%  
    Employee Cost 806 1,011 25.5%
    % of net sales 5.7% 7.7%  
    Power & Fuel 4,150 3,123 -24.8%
    % of net sales 29.6% 23.7%  
    Transportation & Handling 2,284 2,809 23.0%
    % of net sales 16.3% 21.3%  
    Other Expenditure 2,329 2,623 12.6%
    % of net sales 16.6% 19.9%  
    Total operating expenditure 10,394 10,476 0.8%
    % of net sales 74.2% 79.5%  

  • Owing to the high cost pressures, operating profits declined by 25.6% YoY during the quarter. Operating margins during the quarter stood at 20.5% as against 25.8% in 2QFY13.

  • While other income declined by 63.3% YoY during the quarter, depreciation charges increased by 41.2% YoY.

  • While cement segment PBIT margins fell sharply from 16.8% in 2QFY13 to 3.2% in 2QFY14, power segment PBIT margins increased from 22% in 2QFY13 to 38.7% in 2QFY14.

  • Interest expenses declined by 45% YoY during the quarter. The effective tax rate during the quarter stood at 11.7% as against 14.4% in the corresponding quarter of the previous year.

  • Owing to the poor performance of the cement segment, net profits declined by 46.9% YoY. Net profit margins during the quarter stood at 8.8% as against 15.5% in the previous year's corresponding quarter.

  • The company's board of directors has announced an interim dividend of Rs 10 per share. The dividend will be payable to shareholders who hold the shares on the record date i.e. February 03, 2014.
What to expect?
The company's cement segment performance during the quarter was adversely impacted by lower realisations and persistent cost pressures. Given the multiple challenges facing the Indian economy, cement demand is likely to remain under pressure over the medium term. At the same time, inflationary pressures may continue to dent profitability.

At the current prices of Rs 4,375 the stock is trading at 18 times its trailing twelve month standalone 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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