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Shree Cement: Outperforming expectations - Views on News from Equitymaster

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Shree Cement: Outperforming expectations
Jan 29, 2009

Performance summary
  • During 3QFY09, topline grows by 25.6% YoY backed by robust volume growth.
  • The company reports flat growth in operating profits as cost grow at a faster pace compared to topline.
  • Bottomline reports more than three-fold growth owing to 73% drop in depreciation charges. For 9mFY09, topline grows at the rate of 32% YoY. The same boils down to bottomline which grows at a slightly higher rate of 33% YoY.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 5,296 6,653 25.6% 14,466 19,088 31.9%
Expenditure 3,043 4,384 44.1% 8,379 12,886 53.8%
Operating profit (EBITDA) 2,253 2,269 0.7% 6,088 6,202 1.9%
EBITDA margin 42.5% 34.1%   42.1% 32.5%  
Other income 170 183 7.7% 587 636 8.4%
Interest 127 166 30.5% 251 503 100.5%
Depreciation 1,875 509 -72.8% 2,921 1,507 -48.4%
Profit before tax/(loss) 420 1,776 322.5% 3,503 4,828 37.8%
Extraordinary item - 53   - 226  
Tax 70 484 589.9% 921 1,179 27.9%
Profit after tax/(loss) 350 1,239 253.8% 2,582 3,423 32.6%
Net margin 6.6% 18.6%   17.8% 17.9%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         98.9  
P/E (times)         5.1  
*trailing twelve month earnings

What has driven performance in 3QFY09?
  • During 3QFY09, Shree Cement reported nearly 26% YoY growth in topline led by robust growth in volumes. In terms of volume growth, the company has done far better than industry and regional average. The same could be credited to the company’s penetration strategy, low base effect and strong dealer network. During the conference call, the management of the company mentioned that in NCR region, demand has slowed down from realty side and not from rural or individual construction activity. In fact, correction in property prices is likely to sustain demand coming in from the rural and individual construction activity. Second half of fiscal year is generally considered as the peak season for construction activity. Having said that, there are some slippages happening on account of economic slowdown and credit crunch that has halted real estate developers’ activity. As of now, rural demand has been ticking. However, sustained economic slowdown may hurt growth in volumes.

  • If one were to arrive at growth in realisations from available information, then they seemed to have suffered a small fall of 2% YoY. The industry has lined up huge capacities. Even on conservative basis, the upcoming capacities were expected to exert downward pressure on realisations. Amidst supply overhang issue, economy has also slowed down which will further pressurise growth in volumes and hence, pricing power.

    Cost break up
      3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Consumption of raw materials 490 635 29.5% 1,361 1,902 39.8%
    Staff cost 202 256 26.6% 517 753 45.7%
    Power and fuel 893 1,574 76.3% 2,599 4,683 80.1%
    Freight & handling charges 963 1,339 39.0% 2,537 3,653 44.0%
    Other expenditure 495 581 17.4% 1,365 1,896 38.9%
    Total expenses 3,043 4,384 44.1% 8,379 12,886 53.8%

  • A whopping growth in operating costs resulted in 8% decline in EBITDA margins. Except for power and fuel and outward freight costs, the company was able to contain or sustain other operating costs as a percentage of sales basis.

  • Despite flat growth in operating profits, the company reported more than three-fold growth in bottomline. The company has been able to report such stellar numbers at the net level on account of lower depreciation charges. Depreciation was lower by nearly 73% YoY. The same could be attributed to the fact that the company has revalued assets at their historical costs.

What to expect?
The company has outlined capital expenditure in order to maintain market share. It has the option to sell CERs (Carbon Emission Receipts) by July 2010, and hence such income will keep accruing periodically till FY11, giving a boost to net margins. The expected softening of realisations is likely to pressurise margins going forward. However, the commissioning of power plants and benefit of reduction in pet coke prices is expected to start flowing in from FY10 onwards. The cost savings are expected to shield EBITDA margins from witnessing sharp decline.

At the current price of Rs 500, the stock is trading at an enterprise value of over Rs 1,800 based on our FY11 estimates, which makes it attractive considering the replacement cost method. Even though we continue to take a conservative stance on the sector, we maintain our positive view on the stock. We shall soon update our research report on the company.

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