Sep 5, 2007|
Shree Cement: A brief overview
Shree Cement, promoted by the Bangur group is North India's largest cement producer with installed capacity of almost 4 MT. The company, apart from being an efficient cement manufacturer, is the market leader in the north, with a market share of 16% within the region. It is also one amongst the least cost producer in India and is self sufficient in meeting its power requirement.
Capacity and capacity utilisation
Currently, the company has four units, with a combined capacity of 5.6 MTPA. The company has undertaken an aggressive capital expenditure plan after having operated at over 100% capacity utilisation level since the last 4 fiscals. To cater to the increasing demand, the company increased its capacity from 2.7 MTPA in FY04 to 4.1 MTPA in FY07. Nevertheless, the demand overhand continued to pose a demand supply gap and the company operated at 116% capacity utilisation level in FY07. Cement being a fixed cost intensive industry improving capacity utilisation helps achieve economies of scale, which the company has rightly recognised.
What differentiates it?
Cost reduction efforts: The company's topline has grown at CAGR of almost 32% since FY03, which was more driven by cement demand and within the region. The company being one of the least cost producers in India has been enjoying operating margins over 20%. In the past 4 years the company's topline has grown by 32% while the costs grew by 20%. The company tried to improve its operating performance by curtailing costs. The company's continuous efforts to reduce costs by reducing energy consumed, by seeking alternative use of raw materials, and efficient logistics practices has led to operating costs growing at slower pace. The company increased its rail despatches on account of truck loading restrictions, increase in diesel prices etc. The company is self sufficient in meeting its power requirements and its thrust on improving energy consumption ahs brought down the power and fuel consumption. Further, the company has enough limestone reserves to meet its current and future requirements. Though the costs have gone up by almost 20% over the past 4 years on cost per tonne basis, in absolute terms the same have increased by merely 5% owing to the above mentioned factors and its proximity to markets. Improved realisations and efforts to curtail costs resulted in operating profits growing at a CAGR of almost 57% over the past 4 years.
High cash flows: Post FY04, with the demand inching closer to supply realisations improved. With the improved cash flows, the company undertook a debt reduction programme. The debt to equity ratio of the company came down to 0.8 times in FY05 from the highs of 1.1 times in FY03. However, in FY07 the debt to equity ratio of the company went up to 1.8 times as the company chalked out an aggressive expansion plan. On account of its operational efficiencies and optimal utilisation of funds with a judicious mix of rupee and fully hedged foreign currency loans, the company was able to lower its average interest costs by as much as 7.5%. All this enabled the company to increase shareholder value as the return on net worth (RONW) improved to 35% in FY07 (5% in FY06). Though the current growth is led by high realisations that may not be sustainable, one must also note that the company ahs been able to improve its physical performance, which is reflected by improved return on assets.
Expansion plans: Riding on the back of rise in demand, improved realisations and reduction in interest outgo, the company has been able to improve its overall performance. With the improvement in the financial position, the company plans to increase its capacity to 9 MTPA by the end of 2008.
Fares well against the heavyweights: When compared to Ambuja Cement, which is considered the least cost producer, Shree Cement fares well on cost front. The cost per tonne of production in FY07 for the company at stood Rs 1,576, while for Ambuja Cements the cost of production per tonne stood at RS 1,881. This indicates that it is one of the most profitable companies within the cement sector. However, one must note that going forward, the company needs to de risk its revenues geographically to maintain its current positions of being the least cost and most profitable cement producer.
What to expect?
At the current price of Rs 1,339, the stock is trading at an expensive valuation of over US$ 200 on the enterprise value per tonne (EV/tonne) basis as per FY07 numbers.
On the demand front, we expect the northern region to grow in line with the industry. North India is expected to witness demand growth rate of over 7%, driven in part by the forthcoming Commonwealth games, which will result in increased spending on infrastructure by the government. However, with the growth in the sector and waning demand supply gap, producers have lined up capacity expansion plans either by brownfield or greenfield expansion route.
However, once the lined up capacities come on stream, the industry is expected to face excess supply situation. Thus, while the near term scenario is favourable, from a long-term standpoint, risks outweigh rewards.
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