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Shree Cem: Cement biz under pressure - Views on News from Equitymaster
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Shree Cem: Cement biz under pressure
May 6, 2015 | Updated on May 7, 2015

Shree Cement has announced its financial results for the quarter ended March 2015. While the company's sales decreased by 5.2% YoY, net profits plunged 46.2% YoY during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales decreased by 5.2% YoY during the quarter ended March 2015 (3QFY15) on account of subdued performance of both cement and power businesses.
  • Operating profit decreased by 20.8% YoY; operating margins declined from 25.7% in 3QFY14 to 21.5% in 3QFY15.
  • At the bottomline level, net profits declined by 46.2% YoY during the quarter.

Standalone Financial Performance Snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 16,600 15,733 -5.2% 42,245 47,205 11.7%
Expenditure 12,339 12,358 0.2% 32,796 37,419 14.1%
Operating profit (EBITDA) 4,261 3,375 -20.8% 9,449 9,786 3.6%
EBITDA margin 25.7% 21.5%   22.4% 20.7%  
Other income 546 535 -1.9% 1396 1072 -23.2%
Depreciation 1667 2,629 57.8% 3961 6,865 73.3%
Finance costs 363 270 -25.5% 984 943 -4.2%
Profit before tax & exceptional items 2,777 1,010 -63.6% 5,900 3,049 -48.3%
Exceptional gains/(losses) (743)  (40)     (785.4) (115)  
Profit before tax 2,034 971 -52.3% 5,114 2,934 -42.6%
Tax (191) (226) NA 12 (288) NA
Effective tax rate NA NA   0.2% NA  
Profit after tax 2,225 1,197 -46.2% 5,102 3,222 -36.8%
Net profit margin 13.4% 7.6%   12.1% 6.8%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         172.0  
P/E (times)*         60.3  
*trailing twelve month earnings

Note: The company has switched to a June-year ending FY12 onwards. As such, the March quarter is referred to as 3QFY15.

What has driven performance in 3QFY15?
  • During the quarter ended March 2015, Shree Cement reported a drop of 5.2% YoY in the topline. Cement revenues (93% of net sales) declined marginally by 1.6% YoY. Power revenues (including inter segment revenue) reported a decline of 12.5% YoY.

    Segment-wise revenue and profit before interest and tax
    Cement 3QFY14 3QFY15 Change
    Revenue 14,874 14,633 -1.6%
    % of net sales 89.6% 93.0%  
    PBIT 2,177 (367) -116.8%
    PBIT margins 14.6% NA  
    Power
    Revenue (Including inter segment sales) 3,388 2,965 -12.5%
    % of net sales 20.4% 18.8%  
    PBIT 625 1,186 89.7%
    PBIT margins 18.5% 40.0%  

  • It must be noted that depreciation charges went up 57.8% YoY as the depreciation charges for the cement segment more than doubled during the quarter.

  • At the PBIT level, the performance of the cement business was dismal with the company reporting a loss of Rs 367 million at the PBIT level. The power business, on the contrary, witnessed a sharp increase in profitability.

  • Net profit declined by 46.9% YoY during the quarter. Net profit margins during the quarter stood at 7.6% as against 13.4% in the previous year's corresponding quarter.

  • During the nine month period ended March 2015, while sales grew by 11.7% YoY, net profit witnessed a decline of 36.8% YoY.
What to expect?
In line with the overall slowdown in the cement sector, Shree Cement reported a disappointing set of number for the quarter. With excess capacity and muted demand, cement realizations have been under duress.

The company had entered into a business transfer agreement with Jaiprakash Associates on 19th September 2014 for acquiring their 1.5 million tonnes per annum cement grinding unit at Panipat in the state of Haryana. As per the company's latest update, acquisition has been completed on 27th April 2015 for a consideration of Rs 3,582.2 million.

The company's current total cement capacity stands at 22 million tonnes per annum. While capacity utilization rates are currently low, the company's management expects to grow at 14-15% if cement sector demand revives back to 10% growth rate. The recovery may not be immediate and the sector performance is likely to remain subdued in the short to medium term.

However, the long term prospects for cement appear to be robust with the new government's focus on housing and infrastructure development

At the current price level, the stock is trading at 60.3 times its trailing twelve month standalone earnings. We believe that at the current level, the stock is trading at expensive valuations. As such, we reiterate our 'Sell' view on the stock from a 2-3 year perspective.

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