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Shree Cement: Fourth quarter casts a shadow

May 26, 2010

Shree Cement has announced its FY10 results. The company has reported a 34% YoY and 17% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 34% YoY during FY10. The growth has come in on the back of 31% YoY growth in cement revenues and nearly 18% YoY growth in power revenues.
  • Operating profit grows by nearly 58% YoY as costs continue to grow at a slower pace compared to growth in topline.
  • Growth at profit before tax slows down to 23.5% YoY. This is because of increase in interest and depreciation costs.
  • At the net level, growth in profit stands at 17% YoY. Higher tax outgo and extraordinary expense further arrests growth in bottomline.
  • For the 4QFY10, the company reports 17% YoY growth in revenues, while reports loss of Rs 714 m. The last quarter has proven to be a drag on the full year results of the company.
  • The board of the company has recommended final dividend of Rs 8 per share. This along with interim dividend of Rs 5 per share works out to Rs 13 per share.

Financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 8,051 9,440 17.2% 27,106 36,321 34.0%
Expenditure 4,734 6,185 30.6% 17,571 21,296 21.2%
Operating profit (EBITDA) 3,317 3,255 -1.9% 9,535 15,025 57.6%
EBITDA margin 41.2% 34.5%   35.2% 41.4%  
Other income 55 54 -1.8% 391 758 93.7%
Interest 115 504 336.6% 334 766 129.2%
Depreciation 547 2,786 409.4% 2,054 5,704 177.7%
Profit before tax/(loss) 2,710 20 -99.3% 7,538 9,313 23.5%
Extraordinary item 83 549 560.0% 309 634 105.1%
Tax 271 185 -31.8% 1,449 1,918 32.3%
Profit after tax/(loss) 2,356 (714)   5,780 6,761 17.0%
Net margin 29.3% -7.6%   21.3% 18.6%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         194.1  
P/E (times)         10.3  
*trailing twelve month earnings

What has driven performance in FY10?
  • Shree Cement has reported strong growth in topline of 34% YoY. The growth has come in on the back of 31% YoY growth in cement revenues and nearly 18% YoY growth in power revenues. In FY10, cement business contributed nearly 85% to the total revenues. Thus, the growth has largely been driven by cement business. The cement segment has reported double digit growth in cement production of 20.7% YoY. The company has not announced sales volumes. However, we believe that such high level of production numbers must have been achieved to meet the demand for the commodity. Higher volumes and stable to firm realisations led to robust growth of cement business.

  • Operating profits reported robust growth of nearly 58% YoY. This is because cost grew at a slower pace as compared to growth in topline. The company has keeping tight control on costs of operation. To check rising costs of operation the company has been setting up captive power plants. However, rising cost of power generation and higher coal charges are exerting pressure on margins. The fourth especially has seen increase in power costs. The staff costs have also increased substantially. This is because of one time provision made by the company against revision in entitlement of various subsidies provided under Rajasthan Government has been challenged.

  • Profit before tax (PBT) reported growth of 23.5% YoY. The growth in profits at the PBT level has slowed down on account of higher depreciation and interest costs. Had not the other income reported 93.7% YoY growth, growth in PBT would have further slowed down. On the bottomline front, growth stood at 17% YoY. Higher tax outgo and extraordinary expenses further arrested growth in profits. Extraordinary expense includes write offs for assets constructed at others’ premises and provision for statutory liabilities.

What to expect?
The company has outlined capital expenditure in order to maintain market share. The company’s current capacity stands at 12 m tonnes per annum (MTPA) and it plans to scale it up to 15 MTPA by the end of FY11. The company has strategically ventured into power business which currently contributes over 15% to the topline. The company considers power as a sustainable business, which would also help insulate cyclicality of the cement business. While these are positives, the rising costs coupled with expected softening of realisations will pressurise margins of the cement division in the near to medium term.

The company has ended the year almost in line with our expectations. We have factored in the company’s decision of venturing into the power business, however cement still remains a major revenue generator. Viewing it as a cement company, we had valued the stock on asset replacement cost basis. At the current price of Rs 1,995, the stock is trading at an enterprise value of over Rs 5,500 based on our FY12 estimates, which makes it fairly valued. Hence, we maintain our cautious view on the stock.

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