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Shree Cem: Power biz limits profit fall - Views on News from Equitymaster

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Shree Cem: Power biz limits profit fall
Oct 26, 2013

Shree Cement has announced its financial results for the quarter ended September 2013. The company's sales and net profits have reported a decline of 3.8% YoY and 24.5% YoY, respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Standalone net sales decline by 3.8% YoY during the quarter ended September 2013 (1QFY14) on account of poor cement demand and lower realisations.
  • Operating profits decline by 36.1% YoY owing to significant hike in logistics and other expenses.
  • Operating margins contract from 30.1% in 1QFY13 to 20% in 1QFY14.
  • Other income increases by 125.3% YoY during the quarter.
  • While depreciation charges increase by 20.9% YoY, interest expenses decline by 42.6% YoY.
  • The effective tax rate declines from 16.6% in 1QFY13 to 2.8% in 1QFY14.
  • At the bottomline level, net profits decline by 24.5% YoY during the quarter.
  • Net profit margins decline from 17.6% in 1QFY13 to 13.8% in 1QFY14.

Financial performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 12,964 12,475 -3.8%
Expenditure 9,062 9,981 10.1%
Operating profit (EBITDA) 3,902 2,494 -36.1%
EBITDA margin 30.1% 20.0%  
Other income 328 740 125.3%
Depreciation 942 1139 20.9%
Interest 543 312 -42.6%
Profit before tax & exceptional items 2,745 1,783 -35.1%
Exceptional gains/(losses) (10) (11) 8.2%
Profit before tax 2,736 1,773 -35.2%
Tax 454 50 -88.9%
Effective tax rate 16.6% 2.8%  
Profit after tax 2,281 1,722 -24.5%
Net profit margin 17.6% 13.8%  
No of shares (m) 34.8 34.8  
Diluted EPS (Rs)*   272.1  
P/E (times)*   16.3  
*trailing twelve month earnings
Note: The company has switched to a June-year ending FY12 onwards.
As such, the September quarter is referred to as 1QFY14.

What has driven performance in 1QFY14?
  • During the quarter ended September 2013, Shree Cement reported a decline of 3.8% YoY in the topline. Cement revenues (87.1% of net sales) declined by 6.3% YoY on account of sluggishness in the cement sector. However, power revenues (including inter segment revenue) reported a rise of 16.4% YoY. The growth in the power segment partially arrested the decline in the topline.

    Segment-wise revenue and profit before interest and tax
    Cement 1QFY13 1QFY14 Change
    Revenue 11,608  10,872 -6.3%
    % of net sales 89.5% 87.1%  
    PBIT 2,397 522 -78.2%
    PBIT margins 20.7% 4.8%  
    Power      
    Revenue 2,600 3,027 16.4%
    % of net sales 20.1% 24.3%  
    PBIT 602 1,057 75.5%
    PBIT margins 23.2% 34.9%  

  • Operating expenditure increased by 10.1% YoY during the quarter. While power & fuel expenses (24.1% of net sales) declined by 0.4% (as a percentage of net sales), raw material costs (8% of net sales), logistics costs (20% of net sales), employee expenses (8.1% of net sales) and other expenditure (19.8% of net sales) increased by 0.2%, 3.6%, 2.2% and 4.3% respectively (as a percentage of net sales).

    Operating Cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Raw Material Consumption 926 1,045  
    Change in Inventory  49 (48)  
    Total Raw Material Cost 975 997 2.2%
    % of net sales 7.8% 8.0%  
    Employee Cost 773 1,013 31.0%
    % of net sales 6.0% 8.1%  
    Power & Fuel 3,171 3,005 -5.3%
    % of net sales 24.5% 24.1%  
    Transportation & Handling 2,130 2,493 17.1%
    % of net sales 16.4% 20.0%  
    Other Expenditure 2,013 2,474 22.9%
    % of net sales 15.5% 19.8%  
    Total operating expenditure 9,062 9,981 10.1%
    % of net sales 69.9% 80.0%  

  • Owing to the high cost pressures, operating profits declined by 36.1% during the quarter. Operating margins during the quarter stood at 20% as against 30.1% in 1QFY13, decreasing by 1,010 basis points (10.1%).

  • Other income shot up 125.3% YoY during the quarter. Depreciation charges increased by 20.9% YoY.

  • While cement segment PBIT margins declined from 20.7% in 1QFY13 to 4.8% in 1QFY14, power segment PBIT margins increased from 23.2% in 1QFY13 to 34.9% in 1QFY14.

  • Interest expenses declined by 42.6% YoY during the quarter. The effective tax rate during the quarter stood at 2.8% as against 16.6% in the corresponding quarter of the previous year. This was on account of deferred tax and MAT credit entitlements of Rs 22.3 m and Rs 287.2 m respectively.

  • Owing to the poor performance of the cement segment, net profits declined by 24.5% YoY. Net profit margins during the quarter stood at 13.8% as against 17.6% in the previous year's corresponding quarter.
What to expect?
The company's performance during the quarter was adversely impacted due to the slump in cement demand, lower realisations and persistent cost pressures. However, strong growth and profitability of the power segment restricted the fall in sales and profits. Given the multiple challenges facing the Indian economy, cement demand is likely to remain under pressure over the medium term. At the same time, inflationary pressures may continue to dent profitability.

At the current prices of Rs 4,445 the stock is trading at 16.3 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 2-3 year perspective.

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