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Shree Cement: Changing business mix - Views on News from Equitymaster

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Shree Cement: Changing business mix
Oct 29, 2009

Performance summary
  • Revenues grow by 43% YoY led by robust volume growth and higher realisations.
  • Operating profits more than double on account of strong growth in topline and passive growth in costs.
  • Apart from improved operating performance, lower interest costs and reduction in write offs for assets constructed at others’ premises resulted in whopping 168.8% YoY growth in net profits.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 6,280 8,996 43.2% 12,411 18,221 46.8%
Expenditure 4,453 4,914 10.4% 8,477 9,889 16.6%
Operating profit (EBITDA) 1,828 4,082 123.3% 3,933 8,332 111.8%
EBITDA margin 29.1% 45.4%   31.7% 45.7%  
Other income 346 316 -8.7% 470 789 67.9%
Interest 177 155 -12.4% 354 307 -13.3%
Depreciation 537 998 85.9% 998 1,971 97.6%
Profit before tax/(loss) 1,460 3,245 122.3% 3,052 6,843 124.2%
Extraordinary item 97 29 -70.0% 173 71 -58.8%
Tax 288 326 13.4% 695 972 39.8%
Profit after tax/(loss) 1,075 2,889 168.8% 2,184 5,800 165.6%
Net margin 17.1% 32.1%   17.6% 31.8%  
No of shares (m)       34.8 34.8  
Diluted EPS (Rs)*         269.7  
P/E (times)         5.5  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • Shree Cement has reported strong growth in topline of 43% YoY. The cement business accounted for 80% of the company’s revenue, while balance was contributed by excess power sales. A growth of over 20% in cement volumes and firm prices supported the growth. Cement division revenues grew by 39% YoY, while power sales were higher by 34% YoY. Apart from increase in infrastructural spend, sustained demand from rural housing has supported growth in volumes. The company has strategically increased penetration in rural regions.

  • The two-fold growth in operating profits has been the result of slower growth in operating costs and strong show on the topline front. The company been able to lower its cost of consumption of raw materials and power and fuel costs. The benefit of moderate fuel prices on year on year basis helped to contain overall cost of operation. One must also note that company has set up captive power plants. Captive power consumption is not only cost effective but the slag generated during the power generation process can be utilized for cement manufacturing.

  • Profit before tax (PBT) has grown almost in line with operating profits. However, at the net level, growth in profits has come in much higher as compared to PBT. The same is the result of reduction in extraordinary items that includes write offs for assets constructed at others’ premises. Excluding extraordinary item, the growth in net profits is still higher at 149% YoY on account of less than proportionate growth in tax charges. The company’s effective tax rate is lower on account of power sales.

What to expect?
The company has outlined capital expenditure in order to maintain market share. The company has strategically ventured into power business which currently contributes over 15% to the topline. Over the next two years the company plans to increase share of power revenues gradually to one third. Over the long run, the company foresees to generate revenues from power business at par with cement. The company considers power as a sustainable business, which would also help insulate cyclicality of the cement business. While these are positives, the rising costs coupled with expected softening of realisations will pressurise margins going forward.

The company has done better than our expectation on account of its ability to contain the growth in cost of operation, particularly on account of lower power costs. The identification of power as a revenue source has also resulted in its performance that is better than expectations

Viewing it as a cement company, we had valued the stock on asset replacement cost basis. At the current price of Rs 1,490, the stock is trading at an enterprise value of over Rs 4,000 based on our FY12 estimates, which makes it fairly valued. We had recommended a negative view on as then the valuations left little upside potential. We maintain our cautious view on the cement sector as well as the stock from a medium term perspective.

Post meeting with the management we shall update our view on the newly identified revenue stream and its impact on the company’s overall performance.

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