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Shree Cem: Topline rises; net proft drops - Views on News from Equitymaster

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Shree Cem: Topline rises; net proft drops

Dec 1, 2014

Shree Cement has announced its financial results for the quarter and year ended September 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 28.7% YoY during the quarter ended September 2014 (1QFY15) on account of strong recovery in cement sales.
  • Operating profit increased 35.4% YoY as margins expanded by 100 basis points.
  • Sharp decline in other income, higher depreciation and exceptional losses result in a 36.8% YoY decline in net profits during the quarter.

Financial performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 12,475 16,053 28.7%
Expenditure 9,981 12,677 27.0%
Operating profit (EBITDA) 2,494 3,376 35.4%
EBITDA margin 20.0% 21.0%  
Other income 740 309 -58.2%
Depreciation 1,139 2,227 95.5%
Interest 312 350 12.1%
Profit before tax & exceptional items 1,783 1,109 -37.8%
Exceptional gains/(losses) (10.5) (67) 540.0%
Profit before tax 1,773 1,041 -41.3%
Tax 50 (47) -193.0%
Effective tax rate 2.8% NA  
Profit after tax 1,722 1,088 -36.8%
Net profit margin 13.8% 6.8%  
No of shares (m) 34.8 34.8  
Diluted EPS (Rs)*   207.8  
P/E (times)*   43.4  
*trailing twelve month earnings
Note: The company switched to a June-year ending FY12 onwards.
As such, the September quarter is referred to as 1QFY15.

What has driven performance in 1QFY15?
  • During the quarter ended September 2014, Shree Cement reported a rise of 28.7% YoY in the topline. Cement revenues (88.3% of net sales) rose by 30.3% YoY. The power segment reported a recovery in the quarter with revenues (including inter segment revenue) registering a rise of 15.1% YoY.

    Segment-wise revenue and profit before interest and tax
    Cement 1QFY14 1QFY15 Change
    Revenue 10,872 14,171 30.3%
    % of net sales 87.1% 88.3%  
    PBIT 522 292 -44.1%
    PBIT margins 4.8% 2.1%  
    Revenue 3,027 3,483 15.1%
    % of net sales 24.3% 21.7%  
    PBIT 1,057 924 -12.6%
    PBIT margins 34.9% 26.5%  
    Note: Power segment figures
    include inter-segment revenue worth Rs 1,572.5 million

  • Operating expenditure increased at a slightly lower rate that the the topline growth during the quarter. As such operating margins expanded by 100 basis points (1%) from 20% in 1QFY14 to 21% in 1QFY15.

  • Other income dropped sharply by 58.2% YoY.

  • PBIT margins in the cement segment contracted from 4.8% in 1QFY14 to 2.1% in 1QFY15. The power business too saw PBIT margins coming down from 34.9% in 1QFY14 to 26.5% in 1QFY15. It must be noted that a sharp rise of 95.5% YoY in depreciation expenses was responsible for the dip in the margins. The company also reported an exceptional loss of Rs 67.2 m during the quarter as against a loss of Rs 10.5 million on account of write offs on assets constructed at others' premises.

  • As against tax expenses of Rs 50.3 million in 1QFY14, the company reported net tax credit on account of MAT credit entitlement as well as deferred tax.

  • Owing to higher non-operating expenses and lower other income, net profit declined by 36.8% YoY during the quarter. Net profit margins during the quarter stood at 6.8% as against 13.8% in the previous year's corresponding quarter.
What to expect?
The company reported strong recovery in the topline during the quarter. Operating margins too improved by 100 basis points. However, lower other income and sharp escalation in non-operating expenses spoilt the show at the bottomline level.

It must be noted that the company has entered into a business transfer agreement with Jaiprakash Associates for acquiring their 1.5 million tonnes per annum cement grinding unit at Panipat in the state of Haryana for a consideration of Rs 3,565 million. Shree Cements has received the Competition Commission of India's approval for the acquisition. The deal is expected to conclude shortly.

As per the company's management, cement demand in the months of October and November has been weak. As a result, cement prices in north India has dropped by about Rs 10-15 per bag. While the short term outlook for cement appears muted, the new government's focus on housing and infrastructure development as well as the possibility of easing inflationary pressures due to declining international crude oil prices, cement demand should strengthen in the medium to long term.

At the current price level, the stock is trading at 43.4 times its trailing twelve month standalone earnings. We are currently in the process of reviewing and updating our future estimates for the company. We shall share our latest view on the company thereafter.

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