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Shree Cem: Not as good as it looks - Views on News from Equitymaster
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Shree Cem: Not as good as it looks
Nov 18, 2011

Shree Cement has announced its financial results for the quarter and half year ended September 2011. During 2QFY12, the company has reported a rise of 19% YoY and 265% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues rise by 19% YoY during the quarter ended September 2011.
  • Operating profits rise by 40% YoY as operating margins improve from 19.9% in 2QFY11 to 23.5% in 2QFY12.
  • The company reports a rise of 265% YoY in the net profits during the quarter.
  • During 1HFY12, while sales rise by 14% YoY, net profits decline by 20% YoY.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 7,176 8,546 19.1% 16,621 18,886 13.6%
Expenditure 5,749 6,542 13.8% 12,300 14,291 16.2%
Operating profit (EBDITA) 1,427 2,004 40.5% 4,322 4,595 6.3%
Operating profit margin (%) 19.9% 23.5%   26.0% 24.3%  
Other income 255 24 -90.4% 424 26 -93.9%
Depreciation 1,285 1,619 26.0% 2,794 3,217 15.1%
Interest 137 290 111.6% 439 609 38.6%
Exceptional gains/(losses) (75) (11)   (83) (94)  
Profit before tax 185 108 -41.7% 1,429 701 -50.9%
Tax 80 (277)   264 (234)  
Profit after tax/(loss) 105 385 265.3% 1,165 935 -19.7%
Net profit margin (%) 1.5% 4.5%   7.0% 5.0%  
No. of shares (m)       34.8 34.8  
Diluted earnings per share (Rs)*         53.6  
P/E ratio (x)*         37.3  
* trailing twelve month earnings

What has driven performance in 2QFY12?
  • During the quarter ended September 2011, Shree Cement reported a rise of 19.1% YoY in the topline. The rise was mainly attributable to the 23.6% YoY rise in cement revenues. However, the company witnessed 6.7% YoY decline in power revenues during the quarter. The cement segment reported a 13.6% YoY increase in cement production to 2.35 m tonnes in 2QFY12 against 2.07 m tonnes in 2QFY11. The company has not announced sales volumes.

  • Operating profits grew by 40.5% YoY during the quarter. The apparent improvement at the operating level was on account of the lower base effect. Operating profit margins improved from 19.9% in 2QFY11 to 23.5% in 2QFY12. The power business reported a loss of Rs 830.3 m at the operating level (EBIT).

  • Other income declined by 90.4% YoY during the quarter. Interest expenses were significantly higher by 111.6% YoY. This resulted in a 41.7% YoY drop in Profit before Tax (PBT).

  • At the bottomline level, prior period tax reversals and MAT credit entitlements lifted the net profits which increased by 265.3% YoY. Net profit margins increased from 1.5% in 2QFY11 to 4.5% in 2QFY12.

What to expect?
Though the current quarter shows an improvement in year-on-year comparison, sales and profits are significantly down when compared with the immediately preceding quarter ended June 2011. The main reason being that cement off-take tends to be poor during the monsoon season.

Overall, the cement industry still continues to reel under the dual negatives of overcapacity and the slowdown in the construction industry. At the current price of Rs 2,000 the stock is trading at 37.3 times its trailing twelve month earnings. We have a cautious view on the stock from a three year perspective.

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