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Shree Cement: Beats industry growth - Views on News from Equitymaster
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Shree Cement: Beats industry growth
Jul 27, 2009

Performance summary
  • Revenues grow by 50% YoY led by robust growth in volumes and firm realisations.
  • Operating profits double during 1QFY10 as costs grow at a slower pace compared to the topline.
  • Net profits record an impressive growth of 162.5% YoY. A strong show at the operating level, lower interest costs and more than fourfold growth in other income augment the growth in the bottomline.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 6,151 9,229 50.0%
Expenditure 4,025 4,974 23.6%
Operating profit (EBITDA) 2,126 4,255 100.1%
EBITDA margin 34.6% 46.1%  
Other income 104 468 351.7%
Interest 177 152 -14.2%
Depreciation 461 973 111.2%
Profit before tax/(loss) 1,592 3,599 126.0%
Extraordinary item 76 42 -44.6%
Tax 407 645 58.5%
Profit after tax/(loss) 1,109 2,911 162.5%
Net margin 18.0% 31.5%  
No of shares (m) 35 35  
Diluted EPS (Rs)*   217.6  
P/E (times)   7.0  
*trailing twelve month earnings

What has driven performance in 1QFY10?
  • The company reported strong numbers during 1QFY10. The 50% YoY growth in topline was the result of robust growth in volumes and higher realisations. The company reported a 31.6% YoY growth in production volumes. The company’s move to increase penetration especially in rural areas seems to have boosted growth in volumes. The demand from rural housing and infrastructure projects was sustained during the quarter on account of stimulus packages announced by the government. Moreover, delayed monsoon supported the construction activity during the quarter.

    Cost break up
    (% of sales) 1QFY09 1QFY10
    Consumption of raw materials 8.6% 7.7%
    Staff cost 4.1% 3.8%
    Power and fuel 24.6% 15.2%
    Outward freight 19.2% 20.0%
    Other expenditure 8.9% 7.2%

  • Operating profits doubled as costs grew at a slower pace as compared to the topline. The benefit of softening fuel prices seems to have started flowing in. While the company is primarily engaged in the business of cement, it sells surplus power generated from its captive power plants to external parties. At the PBIT level, this segment contributes nearly 39% to the total profits, and accounts for little over 15% of the total revenues. While the cement segment reported a marginal decline in PBIT margins, the improvement in profitability came in on account of higher margins of the power segment.

  • Net profits reported growth of 162.5% YoY. Apart from the good show at the operating level, the enormous growth in the bottomline was supported by lower interest costs and more than four-fold growth in other income.

What to expect?
Shree Cement has outlined capital expenditure in order to maintain market share. It has the option to sell CERs (Carbon Emission Receipts) by July 2010, and hence such income will keep accruing periodically till FY11, giving a boost to net margins. The company has beaten the industry growth rate and has also far exceeded our expectations. At the topline level, the growth has come in on account of sustained demand and firm realisations. Talking about earnings, the newly identified power segment has boosted profitability. Besides the benefits of softened fuel prices which have started flowing in, commissioning of power plants would shield the company from pressure on its core business activity, which is cement, going forward.

At the current price of Rs 1,520, the stock is trading at an enterprise value of over Rs 4,000 based on our FY12 estimates. Even though the company has outperformed our expectations we continue to have a cautious stance on the sector and on the stock.

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