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Shree Cement: Steady topline growth - Views on News from Equitymaster
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Shree Cement: Steady topline growth
Feb 10, 2015

Shree Cement has announced its financial results for the quarter ended December 2014. While the company’s sales increased by 17.1% YoY, net profits reported a decline of 18.9% YoY during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales increased by 17.1% YoY during the quarter ended December 2014 (4QFY14) on account of steady growth in both cement and power sales.
  • Operating profit increased at a slower pace as operating margins declined from 20.5% in 2QFY14 to 19.7% in 2QFY15.
  • At the bottomline level, net profits declined by 18.9% YoY during the quarter.
  • During the six month period ended December 2014, while sales grew by 22.7% YoY, net profit declined by 29.6% YoY

Standalone Financial Performance Snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 13,170 15,419 17.1% 25,645 31,471 22.7%
Expenditure 10,476 12,384 18.2% 20,457 25,061 22.5%
Operating profit (EBITDA) 2,694 3,035 12.7% 5,188 6,411 23.6%
EBITDA margin 20.5% 19.7%   20.2% 20.4%  
Other income 111 227 105.8% 850 536 -36.9%
Depreciation 1156 2,009 73.9% 2294 4,236 84.6%
Interest 309 323 4.3% 621 672 8.2%
Profit before tax & exceptional items 1,339 930 -30.6% 3,122 2,039 -34.7%
Exceptional gains/(losses)  (31.7)  (8)     (42.2) (75)  
Profit before tax 1,308 922 -29.5% 3,080 1,963 -36.3%
Tax 153 (15) NA 203 (62) NA
Effective tax rate 11.7% NA   6.6% NA  
Profit after tax 1,155 937 -18.9% 2,877 2,025 -29.6%
Net profit margin 8.8% 6.1%   11.2% 6.4%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         201.5  
P/E (times)*         53.8  
*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 2QFY15.

What has driven performance in 2QFY15?
  • During the quarter ended December 2014, Shree Cement reported a rise of 17.1% YoY in the topline. Cement revenues (87.7% of net sales) rose by 14.5% YoY driven by 11% growth in sales volumes. Power revenues (including inter segment revenue) reported a growth of 18.1% YoY. The company sold about 490 million units as against 410 million units in the corresponding quarter of the previous financial year.

    Segment-wise revenue and profit before interest and tax
    Cement 2QFY14 2QFY15 Change
    Revenue 11,802 13,516 14.5%
    % of net sales 89.6% 87.7%  
    PBIT 377 183 -51.4%
    PBIT margins 3.2% 1.4%  
    Power
    Revenue (Including inter segment sales) 2,907 3,434 18.1%
    % of net sales 22.1% 22.3%  
    PBIT 1,126 879 -21.9%
    PBIT margins 38.7% 25.6%  

  • The company witnessed about Rs 100 per tonne improvement in cement realisations. Power realisations too increased from Rs 3.35 per unit last year to Rs 3.90 per unit. However, the improvement in realisations could not fully offset the increase in raw material and power and fuel expenses.

    Operating Cost break-up
    (Rs m) 2QFY14 2QFY15 Change
    Raw Material Consumption 1,153 1,410  
    Change in Inventory (243) (169)  
    Total Raw Material Cost 910 1,241 36.4%
    % of net sales 5.9% 8.0%  
    Employee Cost 1,011 1,095 8.3%
    % of net sales 7.7% 7.1%  
    Power & Fuel 3,123 3,954 26.6%
    % of net sales 23.7% 25.6%  
    Transportation Handling 2,809 3,257 15.9%
    % of net sales 21.3% 21.1%  
    Other Expenditure 2,623 2,838 8.2%
    % of net sales 19.9% 18.4%  
    Total operating expenditure 10,476 12,384 18.2%
    % of net sales 79.5% 80.3%  

  • Other income shot up by 105.8% YoY.

  • Depreciation charges witnessed a sharp surge of 73.9% YoY.

  • As such, PBIT margins in the cement segment contracted from 3.2% in 2QFY14 to 1.4% in 2QFY15. The power business also saw PBIT margins coming down from 38.7% in 2QFY14 to 25.6% in 2QFY15.

  • Tax expenses were net of tax credit during the quarter.

  • Net profit declined by 18.9% YoY during the quarter. Net profit margins during the quarter stood at 6.1% as against 8.8% in the previous year’s corresponding quarter.
What to expect?
The company reported strong recovery in the topline during the quarter. However, high input costs and sharp jump in depreciation charges impacted the profitability.

It must be noted that the company has entered into a business transfer agreement with Jaiprakash Associates for acquiring their 1.5 million tonnes per annum cement grinding unit at Panipat in the state of Haryana for a consideration of Rs 3,565 million. Shree Cements has received the Competition Commission of India's approval for the acquisition. The deal is expected to conclude shortly.

The company has already commissioned the cement grinding unit in Chhattisgarh and between April and May it will commission the clinkerisation unit as well.

As far as the future growth outlook is concerned, the company’s management expects to register cement sales of about 16 million tonnes this year as against 13.5 million tonnes last year. And next year it expects to grow at about 11% if the Indian market grows at about 7-8%.

With the new government's focus on housing and infrastructure development as well as the easing inflationary pressures due to the sharp decline in international crude oil prices continues, cement demand should gradually pick up in the medium to long term.

At the current price level, the stock is trading at 53.8 times its trailing twelve month standalone earnings. We believe that at the current level, the stock is trading at expensive valuations. As such, we recommend investors to avoid the stock from a long term perspective.

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