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Shree Cem: Power segment saves the show
Jul 31, 2013

Shree Cement has announced its financial results for the quarter and year ended June 2013. During the quarter, the company has reported a decline of 0.9% YoY and 19.1% YoY in sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Revenues decline marginally by 0.9% YoY during the quarter ended June 2013 owing to poor performance of the cement segment. The robust performance of the power sector restricts
  • the decline in overall sales of the company during the quarter.
  • Operating margins contract by about 680 basis points (6.8%) YoY to 26.7% on account of lower cement realisations.
  • Net profits decline by 19.1% YoY during the quarter. Net profit margins contract from 24.5% in 4QFY12 to 19.6% in 4QFY13.
  • The company's board of directors has declared a final dividend of Rs 12 per share for the financial year ended June 2013.

Financial performance snapshot
(Rs m) 4QFY12 4QFY13 Change FY12^ FY13 Change
Sales 14,364 14,490 0.9% 57,995 55,903 -3.6%
Expenditure 9,553 10,618 11.2% 41,538 40,293 -3.0%
Operating profit (EBITDA) 4,812 3,872 -19.5% 16,458 15,609 -5.2%
Operating profit margin (%) 33.5% 26.7%   28.4% 27.9%  
Other income 322 841 161.4% 1,628 1,883 15.7%
Depreciation 818 1,332 62.8% 8,731 4,356 -50.1%
Interest 480 378 -21.1% 2,354 1,931 -17.9%
Exceptional gains/(losses) (0.6) (0.4)   (123) (11)  
Profit before tax 3,835 3,002 -21.7% 6,878 11,194 62.8%
Tax 320 159 -50.2% 693 1,155 66.7%
Effective tax rate 8.3% 5.3%   10.1% 10.3%  
Profit after tax/(loss) 3,515 2,843 -19.1% 6,185 10,040 62.3%
Net profit margin (%) 24.5% 19.6%   10.7% 18.0%  
No. of shares (m)       34.8 34.8  
Diluted earnings per share (Rs)*         288.2  
P/E ratio (x)*         13.3  
*trailing twelve month earnings
^The company switched to a June-ending financial year FY12 onwards. As such, the figures for
FY12 are for fifteen months and not comparable with FY13 figures.

What has driven performance in 4QFY13?
  • During the quarter ended June 2013, Shree Cement reported a marginal rise of 0.9% YoY in the topline. Cement revenues (78.7% of net sales) declined by 9.7% YoY on account of sluggishness in the cement sector. However, power revenues (including inter segment revenue) rose sharply by 50% YoY. Despite the drop in cement sales, strong revenue growth from the power segment resulted in the marginal topline growth.

    Segment-wise revenue and profit before interest and tax
    (Rs m) 4QFY12 4QFY13 Change
    Revenue
    Cement  12,634 11,407 -9.7%
      88.0% 78.7%  
    Power 3,033 4,551 50.0%
      21.1% 31.4%  
    PBIT
    Cement  3,362 935 -72.2%
      26.6% 8.2%  
    Power 649 1,655 155.2%
      21.4% 36.4%  

  • Operating expenditure increased by 11.2% YoY during the quarter. While raw material costs (9.5% of net sales) and logistics costs (16.2% of net sales) were at similar levels as 4QFY12 (as a percentage of net sales), power & fuel cost (28.1% of net sales), employee expenses (6.5% of net sales) and other expenses (13% of net sales) increased by 4.3%, 1.3% and 1.4% respectively (as a percentage of net sales).

    Operating Cost break-up
    (Rs m) 4QFY12 4QFY13 Change
    Cost of raw materials 1,324 1,415  
    Change in inventory 39 (36)  
    Total Raw Materials 1,362 1,379 1.2%
    % of sales 9.5% 9.5%  
    Employee expenses 746 942 26.2%
    % of sales 5.2% 6.5%  
    Power & fuel 3,415 4,066 19.1%
    % of net sales 23.8% 28.1%  
    Freight & forwarding expenses 2,355 2,341 -0.6%
    % of net sales 16.4% 16.2%  
    Other expenses 1,674 1,890 12.9%
    % of net sales 11.7% 13.0%  
    Total operating expenses 9,553 10,618 11.2%
    % of net sales 66.5% 73.3%  

  • As such, operating profits declined by 19.5% during the quarter. Operating margins during the quarter stood at 26.7% as against 33.5% in 4QFY13, decreasing by 680 basis points (6.8%).

  • Other income shot up 161.4% YoY during the quarter. On the other hand, depreciation charges also increased by 62.8% YoY.

  • Profit before interest and taxes (PBIT) declined by 36.4% YoY during the quarter. While cement segment PBIT margins declined from 26.6% in 4QFY12 to 8.2% in 4QFY13, power segment PBIT margins increased from 21.4% in 4QFY12 to 36.4% in 4QFY13.

  • Interest expenses declined by 21.1% YoY during the quarter. The effective tax rate during the quarter stood at 5.3% as against 8.3% in the corresponding quarter of the previous year. This was on account of deferred tax and MAT credit entitlements of Rs 141.8 m and Rs 54 m respectively.

  • Owing to the poor performance of the cement segment, net profits declined by 19.1% YoY. Net profit margins during the quarter stood at 19.6% as against 24.5% in the previous year’s corresponding quarter.

  • The company’s board of directors has declared a final dividend of Rs 12 per share for the financial year ended June 2013. Along with the interim dividend of Rs 8 per share the total per share dividend for the financial year ended June 2013 stands at Rs 20. At the current stock price level, this translates to a dividend yield of 0.5%.

What to expect?

The poor performance of the cement segment during the quarter was attributable to the overall sluggishness in the cement sector. The negative macroeconomic environment has resulted in a slowdown in the housing and construction sector, which accounts for about two-third of the total cement demand. While slowdown in the Indian economy and excess supply situation will continue to impact the cement sector in the short to medium term, we expect cement demand to grow at about 7% over the next few years.

At the current prices of Rs 3,870 the stock is trading at 13.3 times its trailing twelve month standalone earnings. We believe that at the current level, the stock is trading at expensive valuations, with little room for significant gains. As such, we reiterate our ‘Sell’ view on the stock from a 2-year perspective.

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