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Shree Cem: Lower cement prices hurt margins - Views on News from Equitymaster
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Shree Cem: Lower cement prices hurt margins
Aug 7, 2015

Shree Cement has announced its financial results for the quarter ended June 2015. While the company's sales increased by 4.1% YoY, net profits plunged 62.4% YoY during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales increased by 4.1% YoY during the quarter ended June 2015 (4QFY15) driven by strong growth in the power segment.
  • Operating profit decreased by 18.9% YoY; operating margins declined from 26.2% in 4QFY14 to 20.4% in 4QFY15.
  • At the bottomline level, net profits declined by 62.4% YoY during the quarter.

Standalone Financial Performance Snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 16,514 17,194 4.1% 58,759 64,399 9.6%
Expenditure 12,179 13,678 12.3% 44,975 51,097 13.6%
Operating profit (EBITDA) 4,335 3,516 -18.9% 13,784 13,302 -3.5%
EBITDA margin 26.2% 20.4%   23.5% 20.7%  
Other income 568 444 -21.9% 1964 1515 -22.8%
Depreciation 1538    2,383 54.9% 5499    9,248 68.2%
Finance costs 308 264 -14.3% 1292 1206 -6.6%
Profit before tax & exceptional items 3,057 1,314 -57.0% 8,957 4,363 -51.3%
Exceptional gains/(losses)  (20) (240)   (805) (355)  
Profit before tax 3,037 1,074 -64.6% 8,152 4,008 -50.8%
Tax 267 33 -87.7% 279 (255) NA
Effective tax rate 8.8% 3.1%   3.4% NA  
Profit after tax 2,770 1,041 -62.4% 7,872 4,263 -45.8%
Net profit margin 16.8% 6.1%   13.4% 6.6%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         122.4  
P/E (times)*         94.3  
*trailing twelve month earnings
Note: The company had switched to a June-year ending FY12 onwards. As such, the June quarter is referred to as 4QFY15.

What has driven performance in 4QFY15?
  • During the quarter ended June 2015, Shree Cement reported a drop of 4.1% YoY in the topline. While cement and clinker sales volume reported an impressive rise of 16.9% YoY from 3.72 million tonnes in 4QFY14 to 4.35 million tonnes in 4QFY15, cement prices were down 13% YoY. As a result, cement segment revenues (88.1% of net sales) grew marginally by 1.7% YoY. Power revenues (including inter segment revenue) reported a healthy growth of 27.9% YoY on the back of strong volume growth.

    Segment-wise revenue and profit before interest and tax
    Cement 4QFY14 4QFY15 Change
    Revenue 14,896  15,153 1.7%
    % of net sales 90.2% 88.1%  
    PBIT  2,137 (476) NA
    PBIT margins 14.3% NA  
    Power
    Revenue (Including inter segment sales)  3,116 3,984 27.9%
    % of net sales 18.9% 23.2%  
    PBIT 668 1,845 176.1%
    PBIT margins 21.5% 46.3%  

  • It must be noted that depreciation charges went up 54.9% YoY as the depreciation charges for the cement segment shot up on account of commissioning of new capacities.

  • Finance costs declined by 14.3% YoY as the company's total debt (long term + short term) declined by 42.8% YoY from Rs 10,783 million in FY14 to Rs 6,164 million in FY15.

  • At the PBIT level, the performance of the cement business was dismal with the company reporting a loss of Rs 476 million at the PBIT level. The power business, on the contrary, witnessed a sharp increase in profitability on account of lower fuel prices in the international market.

  • Net profit declined by 62.4% YoY during the quarter. Net profit margins during the quarter stood at 6.1% as against 16.8% in the previous year's corresponding quarter.

  • During the full financial year ended June 2015, while sales grew by 9.6% YoY, net profit witnessed a decline of 45.8% YoY.
What to expect?

Against the overall sluggish demand environment, Shree Cement reported strong volume growth in the quarter ended June 2015. However, the decline in cement realizations coupled with cost pressures severely impacted the bottomline.

The company's current total cement capacity stands at 22 million tonnes per annum. The company's capacity utilization rate stood at 79.1% during the quarter.

The company's management expects cement prices to recover in the coming months. In our view, the sector performance is likely to remain subdued in the short to medium term. However, the long term prospects for cement appear to be robust with the new government's focus on housing and infrastructure development.

At the current price level of about Rs 11,544, the stock is trading at 94.3 times its trailing twelve month standalone earnings and 7.6 times its FY15 standalone book value per share. 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 2-3 year perspective.

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