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Shree Cement: Extraordinary impact… - Views on News from Equitymaster
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Shree Cement: Extraordinary impact…
May 7, 2008

Performance summary
  • Topline grows by 72% YoY and 51% YoY growth during 4QFY08 and FY08 respectively.

  • Operating profit growth of almost 70% YoY and 46% YoY in 4QFY08 and FY08 respectively is lower compared to topline as costs grew at a faster pace.

  • Net profit growth in 4QFY08 has been in line with the topline supported by higher other income and extraordinary gains (the company had written off pre-operative expenses same quarter last year).

  • For the full year, net profit grows by 47% YoY, almost in line with the operating profits.

  • Board has declared dividend of Rs 8 per share (dividend yield 0.9%).

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 3,783 6,501 71.9% 13,680 20,659 51.0%
Expenditure 2,288 3,964 73.2% 7,783 12,035 54.6%
Operating profit (EBITDA) 1,495 2,537 69.7% 5,897 8,624 46.2%
EBITDA margin 39.5% 39.0%   43.1% 41.7%  
Other income 92 146 57.8% 213 733 244.4%
Interest 16 246 1401.9% 104 497 379.3%
Depreciation 1,547 1,867 20.7% 4,331 4,788 10.6%
Profit before tax/(loss) 23 569 2339.2% 1,676 4,072 143.0%
Extraordinary items (212)     (212) 389  
Tax (3) 158 -4963% 118 1,079 814.3%
Profit after tax/(loss) 239 411 71.9% 1,770 2,604 47.1%
Net margin 6.3% 6.3%   12.9% 12.6%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         74.7  
P/E (times)         12.1  
*trailing twelve month earnings
*trailing twelve month earnings

What has driven performance in FY08?
  • Topline of the company grew by almost 72% YoY in 4QFY08 and 51% YoY in FY08 with increased volumes and better realisations (have increased by almost 15% YoY in FY08). While the company has not declared production and despatch numbers, based on the details provided in the CMA monthly publication and the company’s FY07 annual report, we decipher that the company has witnessed almost over 30% YoY growth in volumes (production and despatches). Such robust growth has come in on account of capacity expansion, which has enabled the company to cater to the growing demand for the commodity.

    Cost break-up
    (% of net sales) 4QFY07 4QFY08 FY07 FY08
    Increase / Decrease in stock -1.5% 4.8% -0.1% 0.4%
    Raw material consumed 12.5% 8.8% 12.0% 10.2%
    Purchase of traded goods 0.4% 0.2% 0.5% 0.3%
    Staff costs 5.6% 3.4% 4.2% 3.6%
    Power & Fuel 19.1% 16.5% 17.1% 17.8%
    Transportation & handling 14.1% 19.8% 13.7% 17.0%
    Other expenditure 10.3% 7.5% 9.5% 9.0%

  • As the operational costs grew at much faster pace than the topline, there was almost 1.4% contraction in EBITDA margins. Even on cost per tonne basis the company has witnessed hike of almost 17% YoY. While the company was able to curtail raw material and employee costs, rising power, fuel and transportation and handling charges have pressurised operating margins. The unprecedented hike in prices of petroleum products has boosted power and freight costs.

  • Despite scaling finance charges net profits grew in line with the operating profits, infact a tad higher on account of higher other income and extraordinary items.

  • Till last year, the company used to capitalise expenses incurred on construction of assets for use outside premises. The same now has been charged to the P&L account. While the depreciation charges went up, the growth in replacement cost of assets has been arrested as the company has restated the revalued assets at their historical cost, which has resulted in reduction of gross block. This has led to increase in profits to the tune of Rs 45 m.

  • If one excludes extraordinary income (the company had written off pre-operative expenses same quarter last year), then the net margins have expanded by almost 3.1% YoY in FY08 on account of three-fold growth in other income. The whopping growth in other income is the result of income realised on account of sale of Carbon Emission Receipts (approximately Rs 160 m) and income from investments.

What to expect?
The company has outlined capital expenditure in order to maintain market share and is foraying into southern markets as a move to derisk revenues. The company has the option to sale CERs by July 2010, and hence such income will keep accruing periodically till FY11 giving a boost to net margins. While these are positives, the rising costs coupled with expected softening of realisations will pressurise margins going forward. The industry is likely to maintain its growth momentum and continue growing volumes at around 8% to 10% in the medium to long term, the same will is unlikely to offset the cost pressures and competitive price pressures (upcoming planned capacities likely to exert pressure on the realisations).

At the current price of Rs 906, the stock is trading at an enterprise value of US$ 74 based on FY10 estimates, which makes it attractive considering the replacement cost method. However, considering the above-mentioned factors caution needs to be practiced, while making an investment decision. We shall soon update our research report and our view on the stock.

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