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Shree Cem: Cement sales recover but margins dip - Views on News from Equitymaster

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Shree Cem: Cement sales recover but margins dip
Jul 26, 2014 | Updated on Jul 28, 2014

Shree Cement has announced its financial results for the quarter ended March 2014. While the company's sales increased by 16.2% YoY, net profits reported a decline of 18.8% YoY during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales increase by 16.2% YoY during the quarter ended March 2014 (3QFY14) on account of strong recovery in cement sales.
  • Operating profit increases by 5% YoY; operating profit margin contracts from 28.4% in 3QFY13 to 25.7% in 3QFY14.
  • While depreciation charges increase by 31.8% YoY, interest expenses decline by 18.8% YoY.
  • At the bottomline level, net profits decline by 18.8% YoY during the quarter.
  • Net profit margin declines from 19.2% in 3QFY13 to 13.4% in 3QFY14.

Financial performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 14,281 16,600 16.2% 41,257 42,245 2.4%
Expenditure 10,222 12,339 20.7% 29,679 32,796 10.5%
Operating profit (EBITDA) 4,058 4,261 5.0% 11,579 9,449 -18.4%
EBITDA margin 28.4% 25.7%   28.1% 22.4%  
Other income 572 546 -4.5% 1201 1396 16.2%
Depreciation 1265 1,667 31.8% 3025 3961 31.0%
Interest 447 363 -18.8% 1553 984 -36.6%
Profit before tax & exceptional items 2,918 2,777 -4.8% 8,202 5,900 -28.1%
Exceptional gains/(losses) - (743)   (10) (785) 7600.0%
Profit before tax 2,918 2,034 -30.3% 8,192 5,114 -37.6%
Tax 176 -191 NA 995 12 -98.8%
Effective tax rate 6.0% NA   12.1% 0.2%  
Profit after tax 2,741 2,225 -18.8% 7,197 5,102 -29.1%
Net profit margin 19.2% 13.4%   17.4% 12.1%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         228.1  
P/E (times)*         31.2  
*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 3QFY14.

What has driven performance in 3QFY14?
  • During the quarter ended March 2014, Shree Cement reported a rise of 16.2% YoY in the topline. Cement revenues (89.6% of net sales) rose by 28.9% YoY. However, power revenues (including inter segment revenue) reported a decline of 20.8% YoY.

    Segment-wise revenue and profit before interest and tax
    Cement 3QFY13 3QFY14 Change
    Revenue 11,541 14,874 28.9%
    % of net sales 80.8% 89.6%  
    PBIT 2,254 2,177 -3.4%
    PBIT margins 19.5% 14.6%  
    Power
    Revenue 4,280 3,388 -20.8%
    % of net sales 30.0% 20.4%  
    PBIT 694 625 -9.9%
    PBIT margins 16.2% 18.5%  

  • Operating expenditure increased by 20.7% YoY during the quarter. While power & fuel expenses (23% of net sales) declined by 1.4% (as a percentage of net sales), transportation and handling costs (20.6% of net sales) and other expenditure (18.7% of net sales) increased by 3.9% and 1.5% respectively (as a percentage of net sales).

    Operating Cost break-up
    (Rs m) 3QFY13 3QFY14 Change
    Raw Material Consumption 1,074 1,195  
    Change in Inventory 11 (118)  
    Total Raw Material Cost 1,085 1,076 -0.8%
    % of net sales 6.5% 6.5%  
    Employee Cost 794 915 15.3%
    % of net sales 5.6% 5.5%  
    Power & Fuel 3,487 3,818 9.5%
    % of net sales 24.4% 23.0%  
    Transportation & Handling 2,395 3,426 43.0%
    % of net sales 16.8% 20.6%  
    Other Expenditure 2,462 3,103 26.1%
    % of net sales 17.2% 18.7%  
    Total operating expenditure 10,222 12,339 20.7%
    % of net sales 71.6% 74.3%  

  • Operating profit grew by 5% YoY during the quarter. Operating margins during the quarter stood at 25.7% as against 28.4% in 3QFY13.

  • While other income declined by 4.5% YoY during the quarter, depreciation charges increased by 31.8% YoY.

  • While cement segment PBIT margins dropped from 19.5% in 3QFY13 to 14.6% in 3QFY14, power segment PBIT margins increased from 16.2% in 3QFY13 to 18.5% in 3QFY14.

  • Interest expenses declined by 18.8% YoY during the quarter.

  • The company reported an exceptional loss of Rs 737.3 m during the quarter on account of various provisions and write offs.

  • The company reported net tax credit of Rs 190.9 m on account of some prior period tax and deferred tax items.

  • Owing to the lower profitability of the cement segment as well as the exceptional losses, net profits declined by 18.8% YoY. Net profit margins during the quarter stood at 13.4% as against 19.2% in the previous year's corresponding quarter.

  • During the nine-month period ended March 2014, while sales grew marginally by 2.4% YoY, net profit witnessed a 29.1% YoY fall.
What to expect?

The company's performance during the quarter was a mixed bag. While cement sales reported a robust recovery, cement profit margins continued to remain under pressure. On the other hand, the power segment witnessed a decline in sales but improvement in margins. During the quarter, the company commissioned waste heat recovery power plant at Bangur City, Ras.

Given the persistent slowdown in the housing and infrastructure sector, the prospects of the cement sector are likely to remain sluggish over the medium term. Nonetheless, the long term prospects for the Indian economy and the cement sector appear positive owing to the huge demand for housing and infrastructure in the country.

At the current prices of Rs 7,110 the stock is trading at 31.2 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 year perspective.

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