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Shree Cement: Squeezed margins… - Views on News from Equitymaster
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Shree Cement: Squeezed margins…
Jul 23, 2008

Performance summary
  • Topline grows by 39% YoY during 1QFY09 on the back of robust volume growth and improved realisations.
  • EBITDA margins contract by 7% as operating costs grow at faster pace compared to topline.

  • Higher finance costs and extraordinary expenses cause the bottomline to register a 5% YoY fall.



Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 4,410 6,143 39.3%
Expenditure 2,587 4,038 56.1%
Operating profit (EBITDA) 1,823 2,106 15.5%
EBITDA margin 41.3% 34.3%  
Other income 126 118 -6.8%
Interest 39 171 334.3%
Depreciation 358 461 28.7%
Profit before tax/(loss) 1,552 1,592 2.6%
Extraordinary items - 76  
Tax 383 407 6.3%
Profit after tax/(loss) 1,169 1,109 -5.1%
Net margin 26.5% 18.1%  
No of shares (m) 34.8 34.8  
Diluted EPS (Rs)*   84.2  
P/E (times)   6.2  
*trailing twelve month earnings

What has driven performance in 1QFY09?
  • Topline of the company grew by 39% YoY in 1QFY09 on the back of robust volume growth and improved realisations. The company has reported 25% YoY growth in volumes, while realisations have improved by almost 12% YoY during 1QFY09. The company has continued to outpace industry growth rate of 9% to 10%. The company has been able to report such robust growth in volumes 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) 1QFY08 1QFY09
    Increase / Decrease in stock -1.7% -1.0%
    Raw materials consumed 11.7% 9.4%
    Purchase of traded goods 0.3% 0.3%
    Staff costs 3.5% 4.1%
    Power & Fuel 18.7% 24.7%
    Transportation & handling 17.5% 19.3%
    Other expenditure 8.6% 9.1%

  • Though the company witnessed better volumes and realisations, the effect of the same is not visible at the operating level, as scaling operating costs have pressurised operating margins. The increased cost of operation contracted EBITDA margins by 7% YoY during 1QFY09. The costs in absolute terms have witnessed 56% YoY growth, while on a cost per tonne basis they have moved up by 25% YoY in 1QFY09. Apart from the inflationary pressures currently being witnessed within the economy, the increased energy prices have taken toll on the company’s overall profitability. The power and fuel costs on cost per tone basis have increased by 47% YoY during the quarter.

  • More than four-fold growth in interest cost has exerted further pressure on the strained margins. The higher finance costs, lower other income and extraordinary expenses (expenses incurred on assets constructed at other’s premises) have pulled down net profits by 5% YoY in 1QFY09. Till last year, the company used to capitalise expenses incurred on construction of assets for use outside premises. However, 4QFY08 onwards the same is being charged to the P&L account.

  • If one excludes extraordinary income (the company had written off pre-operative expenses same quarter last year), then the net profits have witnessed marginal growth of 1.3% YoY.

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 (Carbon Emission Receipts) 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 though 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 555, the stock is trading at an enterprise value of over US$ 40 (Rs 1,914) based on FY11 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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