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Shree Cement: Steep costs change fortunes - Views on News from Equitymaster

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Shree Cement: Steep costs change fortunes

Oct 20, 2008

Performance summary
  • Topline grows by 32% YoY and 35.6% YoY during 2QFY09 and 1HFY09 respectively on the back of robust volume growth and better realisations.

  • Scaling cost of operation dented EBITDA margins by 13% YoY and 10% YoY in 2QFY09 and 1HFY09 respectively.

  • Increased other income and lower tax outgo provided cushion to bottomline that improved by 1% in 2QFY09. However, more than two-fold growth in interest expense in 1HFY09 led to 2% YoY fall in net profits.

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 4,760 6,292 32.2% 9,170 12,435 35.6%
Expenditure 2,749 4,464 62.4% 5,336 8,502 59.3%
Operating profit (EBITDA) 2,011 1,828 -9.1% 3,835 3,933 2.6%
EBITDA margin 42.3% 29.0% 41.8% 31.6%
Other income 291 336 15.4% 417 454 8.6%
Interest 85 167 97.2% 124 337 172.4%
Depreciation 688 537 -21.9% 1,046 998 -4.6%
Profit before tax/(loss) 1,530 1,460 -4.6% 3,083 3,052 -1.0%
Extraordinary item - 97 - 173
Tax 468 288 -38.5% 851 695 -18.3%
Profit after tax/(loss) 1,062 1,075 1.2% 2,231 2,184 -2.1%
Net margin 22.3% 17.1% 24.3% 17.6%
No of shares (m) 35 35
Diluted EPS (Rs)* 73.4
P/E (times) 6.3
*trailing twelve month earnings

What has driven performance in 2QFY09
  • In 1HFY09, the company reported nearly 36% YoY growth in topline largely backed by robust growth in volumes. The company has witnessed 23% YoY growth in despatches during the half year ended September 2008. The growth has also come in on account of improved realisations (10% YoY). The company was able to command pricing power in the northern regions on account of its leadership position and move to tap adjacent rural unexplored markets. However, going forward as announced capacities become operational and demand gets tempered by economic slowdown; the pricing power may not persist. Moreover, if the lull in the real estate sector continues, the growth in volumes may also be on a lower side.

    Cost break-up

    (% of sales) 2QFY08 2QFY09 1HFY08 1HFY09
    Consumption of raw materials 8.7% 11.7% 9.5% 10.2%
    Staff cost 3.4% 3.9% 3.4% 4.0%
    Power and fuel 18.6% 25.3% 18.6% 25.0%
    Outward freight 16.8% 18.0% 17.2% 18.6%
    Other expenditure 10.3% 12.0% 9.5% 10.6%

  • The rise in cost of operation exerted pressure on Shree Cementís operating margins. This was on account of general increase in price level and higher fuel and raw material costs. The EBITDA margins of the company contracted by 13% YoY and 10% YoY in 2QFY09 and 1HFY09 respectively.

  • While operating profits declined by 9% YoY in 2QFY09, net profits reported tepid 1.2% YoY growth. The same has been the result of lower tax outgo and increased other income. However, in 1HFY09 the bottomline did witness a fall of 2% YoY on account of more than two-fold growth in interest expense.

  • If one excludes the extraordinary item during both the periods (the company had written off expenses incurred on construction of assets at othersí premises), then the net profits have actually reported growth of 10% YoY and 5.6% YoY in 2QFY09 and 1HFY09.

  • Till last year, the company used to capitalise expenses incurred on construction of assets for use outside premises. However, 4QFY08 onwards the same is being charged to the P&L account.

What to expect?
The company has outlined capital expenditure in order to maintain market share and is foraying into southern markets as a move to derisk its revenues. 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. While these are positives, the rising costs coupled with expected softening of realisations will pressurise margins going forward.

At the current price of Rs 465, the stock is trading at an enterprise value of over Rs 1,700 based on our FY11 estimates, which makes it attractive considering the replacement cost method. The companyís performance has been better compared to our full year estimates. Although we continue to take a conservative stance on the sector, we maintain our positive view on the stock.

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Mar 19, 2019 11:21 AM


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