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Shree Cem: Cement biz improves; power drops - Views on News from Equitymaster
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Shree Cem: Cement biz improves; power drops
Sep 17, 2014

Shree Cement has announced its financial results for the quarter and year ended June 2014. While the company's sales increased by 14.6% YoY, net profits reported a decline of 2.6% YoY during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales increase by 14.6% YoY during the quarter ended June 2014 (4QFY14) on account of strong recovery in cement sales.
  • Operating profit increased almost in line with the growth in the topline.
  • At the bottomline level, net profits decline by 2.6% YoY during the quarter.
  • During the full financial year, while sales grew by 5.5% YoY, net profit declined by 21.6% YoY

Financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 14,414 16,514 14.6% 55,671 58,759 5.5%
Expenditure 10,615 12,179 14.7% 40,293 44,975 11.6%
Operating profit (EBITDA) 3,800 4,335 14.1% 15,378 13,784 -10.4%
EBITDA margin 26.4% 26.2%   27.6% 23.5%  
Other income 913 568 -37.8% 2,114 1,964 -7.1%
Depreciation 1332 1,538 15.5% 4,356 5,499 26.2%
Interest 378 308 -18.7% 1,931 1,292 -33.1%
Profit before tax & exceptional items 3,003 3,057 1.8% 11,205 8,957 -20.1%
Exceptional gains/(losses) (0.4) (20)   (11) (805) 7495.3%
Profit before tax 3,002 3,037 1.2% 11,194 8,152 -27.2%
Tax 159 267 67.6% 1,155 279 -75.8%
Effective tax rate 5.3% 8.8%   10.3% 3.4%  
Profit after tax 2,843 2,770 -2.6% 10,040 7,872 -21.6%
Net profit margin 19.7% 16.8%   18.0% 13.4%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         226.0  
P/E (times)*         37.4  
*trailing twelve month earnings
Note: The company has switched to a June-year ending FY12 onwards. As such, the June quarter is referred to as 4QFY14.

What has driven performance in 4QFY14?
  • During the quarter ended June 2014, Shree Cement reported a rise of 14.6% YoY in the topline. Cement revenues (90.2% of net sales) rose by 30.6% YoY. However, power revenues (including inter segment revenue) reported a decline of 31.5% YoY.

    Segment-wise revenue and profit before interest and tax
    Cement 4QFY13 4QFY14 Change
    Revenue  11,407  14,896 30.6%
    % of net sales 79.1% 90.2%  
    PBIT 935 2,137 128.7%
    PBIT margins 8.2% 14.3%  
    Power
    Revenue 4,551 3,116 -31.5%
    % of net sales 31.6% 18.9%  
    PBIT 1,655  668 -59.6%
    PBIT margins 36.4% 21.5%  

  • Operating expenditure increased in line with the topline growth during the quarter. As such operating margins were maintained close to the levels seen in the corresponding quarter of the previous year.

    Operating Cost break-up
    (Rs m) 4QFY13 4QFY14 Change
    Raw Material Consumption 1,077 1,245  
    Change in Inventory  (56)  246  
    Total Raw Material Cost 1,021 1,492 46.1%
    % of net sales 6.2% 9.0%  
    Employee Cost 1,007 1,014 0.7%
    % of net sales 7.0% 6.1%  
    Power & Fuel 3,985 3,842 -3.6%
    % of net sales 27.6% 23.3%  
    Transportation & Handling 2,341 3,177 35.7%
    % of net sales 16.2% 19.2%  
    Other Expenditure 2,261 2,655 17.4%
    % of net sales 15.7% 16.1%  
    Total operating expenditure  10,615  12,179 14.7%
    % of net sales 73.6% 73.8%  

  • Other income dropped by 37.8% YoY.

  • PBIT margins in the cement segment improved from 8.2% in 4QFY13 to 14.3% in 4QFY14. However, the power business saw PBIT margins coming down from 36.4% in 4QFY13 to 21.5% in 4QFY14.

  • The company reported an exceptional loss of Rs 19.7 m during the quarter on account of write offs on assets constructed at others' premises.

  • Tax expenses rose sharply by 67.6% YoY during the quarter.

  • Net profit declined by 2.6% YoY during the quarter. Net profit margins during the quarter stood at 16.8% as against 19.7% in the previous year's corresponding quarter.

  • During the full financial year ended June 2014, while sales grew by 5.5% YoY, net profit witnessed a decline of 21.6% YoY.
What to expect?
The company's performance during the year was a mixed bag. While cement sales reported a modest recovery of about 15% YoY, cement profit margins continued to remain under pressure. On the other hand, the power segment witnessed a decline in both sales and profit margins. The company paid out a total dividend per share of Rs 22 for the financial year 2013-14. The company has completed the following projects:
  • 2 million tonnes per annum grinding unit at Bangur city, Ras. Commercial production commenced on 16th May 2014.
  • 6,000 tonnes per day clinker unit at Bangur city, Ras. Commercial production commenced on 30th June 2014.
  • 2 million tonnes per annum grinding unit at Aurangabad in Bihar. Commercial production commenced on 9th July 2014.
At the current prices of Rs 8,463 the stock is trading at 37.4 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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