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Shree Cem: Power segment lifts profits
Apr 29, 2013

Shree Cement has announced its financial results for the quarter ended March 2013. During the quarter, the company has reported a rise of 7% YoY and 140% YoY in sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Revenues rise by 6.9% YoY during the quarter ended March 2013 driven by robust growth in the power segment.
  • Operating margins improve by about 140 basis points (1.4%) YoY to 28.6% on account of lower raw material and power & fuel costs.
  • Other income declines by 44.6% YoY during the quarter, while depreciation charges decline by 46.1% YoY.
  • Tax expenses decline by 69.4% YoY on account of MAT credit entitlements.
  • Robust performance from the power segment causes net profits to increase by 139.8% YoY. Net profit margins improve from 8.3% in 3QFY12 to 18.6% in 3QFY13.
  • During the nine-month period ended March 2013 (9MFY13), sales and profits increased by 23.3% YoY and 239.5% YoY respectively.
  • The company's board of directors has declared an interim dividend of Rs 8 per share for the ongoing financial year.

Financial performance snapshot^
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Sales 13,763 14,716 6.9% 34,241 42,235 23.3%
Expenditure 10,032 10,514 4.8% 25,186 30,498 21.1%
Operating profit (EBITDA) 3,732 4,202 12.6% 9,055 11,737 29.6%
Operating profit margin (%) 27.1% 28.6%   26.4% 27.8%  
Other income 772 428 -44.6% 1,148 1,043 -9.2%
Depreciation 2,346 1,265 -46.1% 6,316 3,025 -52.1%
Interest 411 447 8.9% 1,399 1,553 11.1%
Exceptional gains/(losses) (28.4) (1)   (40) (10)  
Profit before tax 1,719 2,917 69.7% 2,449 8,192 234.5%
Tax 576 176 -69.4% 330 995 202.0%
Profit after tax/(loss) 1,143 2,741 139.8% 2,120 7,197 239.5%
Net profit margin (%) 8.3% 18.6%   6.2% 17.0%  
No. of shares (m)       34.8 34.8  
Diluted earnings per share (Rs)*         307.5  
P/E ratio (x)*         14.4  
*trailing twelve month earnings
^The company switched to a June-ending financial year FY12 onwards

What has driven performance in 3QFY13?
  • During the quarter ended March 2013, Shree Cement reported a rise of 6.9% YoY in the topline. Cement revenues (80.4% of net sales) declined marginally by 0.5% YoY on account of sluggishness in the cement sector. However, power revenues (including inter segment revenue) rose by 27.8% YoY.

  • Operating profits reported a rise of 12.6% YoY during the quarter. Barring employee expenses and other expenses, all major cost heads witnessed some moderation. Raw material costs, power & fuel costs and freight & forwarding expenses declined by 1.1%, 2.1% and 1.6% respectively (as a percentage of net sales).

    Operating Cost break-up
    (Rs m) 3QFY12 3QFY13 Change
    Cost of raw materials 1,457 1,407  
    Change in inventory 12 5  
    Total Raw Materials 1,469 1,411 -3.9%
    % of sales 10.7% 9.6%  
    Employee expenses 605 747 23.4%
    % of sales 4.4% 5.1%  
    Power & fuel 3611 3545 -1.8%
    % of net sales 26.2% 24.1%  
    Freight & forwarding expenses 2460 2395 -2.6%
    % of net sales 17.9% 16.3%  
    Other expenses 1887 2416 28.0%
    % of net sales 13.7% 16.4%  
    Total operating expenses 10,032 10,514 4.8%
    % of net sales 72.9% 71.4%  

  • As such, operating margins during the quarter stood at 28.6%, increasing by 140 basis points (1.4%). The cement segment reported 10.2% YoY dip in Profits before Interest and Taxes (PBIT). However, the power segment reported PBIT of Rs 694 m as against losses of Rs 686 m at the PBIT level in the corresponding quarter of the previous financial year.

  • Other income dropped by 44.6% YoY during the quarter. On the other hand, depreciation charges declined by 46.1% YoY. The effective tax rate during the quarter stood at 6% as against 33.5% in the corresponding quarter of the previous year. This was on account of MAT credit entitlements of Rs 484.1 m.

  • Robust performance by the power sector coupled with lower depreciation and tax expenses resulted in a strong bottomline growth of139.8% YoY. Net profit margins during the quarter stood at 18.6% as against 8.3% in the previous year's quarter.

  • During 9MFY13, sales and profits increased by 23.3% YoY and 239.5% YoY respectively. Net profit margins improved from 6.2% in 9MFY12 to 17% in 9MFY13.

  • The company's board of directors has declared an interim dividend of Rs 8 per share for the financial year ended June 2013.

What to expect?
The topline growth was moderate on account of slowdown in cement demand. The power segment, however, reported a sharp recovery in sales and profits. While slowdown in the Indian economy and excess supply situation will continue to impact the cement sector in the short to medium term, we expect cement demand to grow at about 7-8% over the next few years.

At the current prices of Rs 4,425 the stock is trading at 14.4 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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