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Shree Cement: Voluminous growth - Views on News from Equitymaster
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Shree Cement: Voluminous growth
May 4, 2009

Performance summary
  • In FY09, topline grows by 29% YoY led by robust growth in volumes.
  • Operating costs continue to outpace topline growth resulting into 5.9% contraction in EBITDA margins.
  • Bottomline reports more than two-fold growth on account of lower depreciation and lower tax outgo.
  • For 4QFY09, topline grows at the rate of 22% YoY, while bottomline witnesses more than five-fold growth.
  • Recommends a dividend of Rs 10 per share (Rs 5 as interim dividend and Rs 5 as final dividend), resulting into a dividend yield of nearly 2% at current prices.


Financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 6,625 8,062 21.7% 21,091 27,150 28.7%
Expenditure 4,088 4,756 16.3% 12,467 17,643 41.5%
Operating profit (EBITDA) 2,537 3,306 30.3% 8,624 9,508 10.2%
EBITDA margin 38.3% 41.0%   40.9% 35.0%  
Other income 153 169 10.3% 768 829 7.9%
Interest 254 218 -14.3% 533 744 39.7%
Depreciation 1,867 547 -70.7% 4,788 2,054 -57.1%
Profit before tax/(loss) 569 2,710 376.4% 4,072 7,538 85.1%
Extraordinary item - 83   389 309 -20.5%
Tax 158 271 71.2% 1,079 1,449 34.3%
Profit after tax/(loss) 411 2,356 473.7% 2,604 5,780 122.0%
Net margin 6.2% 29.2%   12.3% 21.3%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         165.9  
P/E (times)         4.7  
*trailing twelve month earnings

What has driven performance in FY09?
  • In FY09, the company has reported topline growth of 29% YoY on the back of robust growth in volumes. The company’s move to increase penetration especially in rural areas seems to have boosted growth in volumes. Good monsoon and stimulus packages announced by the government have supported rural housing demand. Also, ongoing infrastructural activity especially to support commonwealth games seems to have also propped up demand for the commodity.

  • Operating cost continue to grow at a faster pace compared to topline growth, thus impacting growth in operating profits. Operating profits grew at the rate of 10% YoY in FY09 on account of whopping 30% YoY growth witnessed in 4QFY09. As a percentage of sales, barring raw material costs, all the cost heads witnessed expansion. Apart from the company’s efforts to keep costs under control, improved profitability of the power division restricted fall in margins. The company sells excess power generated through its captive power plants to external parties. Power division has been recently identified as the new business segment.

    Cost break up

    (% of sales) 4QFY08 4QFY09 FY08 FY09
    Consumption of raw materials 13.6% 8.9% 10.7% 9.7%
    Staff cost 3.3% 3.5% 3.5% 3.8%
    Power and fuel 16.2% 17.1% 17.4% 22.3%
    Outward freight 21.3% 21.7% 18.7% 19.9%
    Other expenditure 7.3% 7.8% 8.8% 9.3%

  • The company continues to report whopping growth at the net level on account of lower depreciation charges. The lower depreciation is 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 776, the stock is trading at an enterprise value of over Rs 2,800 based on our FY11 estimates. The company has outperformed our expectations on the back of robust growth in the last quarter of the fiscal year ended March, 2009. Even though we continue to take a conservative stance on the sector, we maintain our view on the stock. We shall soon update our research report on the company.

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