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Cement

November 11, 2014

Shree Cement

India Research

Bloomberg: SRCM IN
Reuters: SHCM.BO

RESULT REVIEW

HOLD

Strong Cement Volume Growth amid Cost
Efficiency; Lower NSR QoQ moderates Profit Growth

Recommendation

Shree Cement’s 1QFY15 net sales & EBITDA rose 29% & 37% YoY to Rs16.1
bn & Rs3.4 bn respectively while PAT declined 33% YoY to Rs1.16 bn.
Cement EBITDA rose 46% YoY to Rs3.2 bn. However, Power EBITDA
declined 32% YoY to Rs210mn (6% of total EBITDA).
Cement EBITDA expanded by Rs150 per MT YoY to Rs821: Demand pickup in north YoY and market share gain led by capacity expansion helped
Shree Cement’s 19% YoY (+5% QoQ) volume growth to 3.9 mn MT.
However, NSR dipped 9% QoQ (our estimates 7% QoQ decline) led by
impact of monsoon quarter and competitive pressure in non-trade segment.
Despite the sharp QoQ decline, low base of last year boosted YoY NSR
growth to 10%. Operating costs per MT remained stable QoQ (+6% YoY) inline with our expectations. Subsequently, aided by both strong volume and
NSR growth, Cement EBITDA rose 46% YoY (6% lower vs our estimates).

52-week High/Low (Rs)

CMP:

Rs9,250

Target Price:

Rs9,760

Previous Target Price:

Rs9,300

Upside (%)

6%

Stock Information
Market Cap. (Rs bn / US$ mn)

322/5,239
9,298/4,100

3m ADV (Rs mn/US$mn)

167/5.7

Beta

1.0

Sensex/ Nifty

27,875/8,344

Share outstanding (mn)

35

Stock Performance (%)
Absolute

1M
11.1

3M
27.7

12M YTD
45.0 113.1

4.8

16.1

55.2

Rel. to Sensex

Power volumes surge but cost pressure leads to dip in profitability: While
Performance
merchant power sales rose 17% YoY to 488mn KwH, generation cost rose
29,500
11% YoY ahead of 1% NSR growth. Subsequently, power EBITDA declined
27,500
25,500
23,500
32% YoY to 210mn. (54% lower vs our estimates). Total EBITDA rose 37%
21,500
19,500
YoY (11% below our estimates). Thereafter, Shree Cement’s depreciation
17,500
15,500
doubled YoY on account of capacity addition. This along-with lower other
income led to 33% YoY decline in PAT (vs our estimates of 18% growth).

Net Sales
EBITDA
EBITDA margin (%)
PAT (Rs)
EPS (Rs)
RoE (%)
RoCE (%)
EV/EBITDA (x)
P/E (x)
Source: Company, Karvy Stock Broking

Sensex (LHS)

Shree Cement (RHS)

Source: Bloomberg, Karvy Stock Broking

Earnings Revision
(%)
Sales

FY15E

FY16E

FY17E

2.5

0.8

0.4

-

-

-

10.2

2.3

1.0

EBITDA
PAT

Source: Karvy Stock Broking

Exhibit 1: Financial Summary (Standalone)
Y/E Jun (Rs mn)

11,000
9,000
7,000
5,000
3,000

Nov-13
Dec-13
Jan-14
Mar-14
Apr-14
May-14
Jul-14
Aug-14
Sep-14
Nov-14

Strong franchise but rich valuation; Downgrade to “HOLD”: While we
maintain our EBITDA estimates, we cut PAT estimates for FY15E/16E/17E by
10%/ 2%/ 1% respectively to factor in higher depreciation cost. Driven by its
aggressive but cost efficient expansions, Shree Cement should deliver 15%
cement volume CAGR during FY14-17E. Shree will have diversified and
major sales presence in the northern, central and eastern regions by end of
FY16E. These should drive its 34% EBITDA CAGR. We value Shree’s
cement/power businesses at 9x/5x (earlier 8.5x/4x) FY17E EBITDA on account
of its cost leadership despite its fast expansion. This leads to SOTP value of
Rs9,760 (earlier 9,300) and implies EV per MT of USD180 (FY17E). With
limited upside on CMP we downgrade the stock to “HOLD” from “BUY”.

FY13

FY14

FY15E

FY16E

FY17E

55,894
15,603

58,873
13,898

75,942
19,521

91,686
26,466

110,879
33,812

27.9

23.6

25.7

28.9

30.5

10,005

8,586

10,101

17,982

25,005

287.2

246.5

289.9

516.2

717.8

30.4

20.1

19.8

28.7

30.6

26.1

18.4

19.8

28.8

33.2

32.2

37.5

31.9

17.9

12.9

19.7

21.8

15.4

11.0

8.2

61.8

Analysts Contact
Rajesh Kumar Ravi
022 6184 4313
rajesh.ravi@karvy.com

844 1.1) 24.973 3.4 2.875 2.415 3.809 3.0 (42.081 28.177 3.805 404 604 1.185 3.2 498 3.0 (2.835 821 9.011 915 1.021 997 910 1.1 (30.1) 8.181 16.7 34.602 322 554 876 739 318 718 2.9 (6.8) (4.284 2.1 8.516 2.9 2.720 1.667 1.2) 6.1 0.0 3.8 11.7 15.November 11.458 (30.288 3.9) Total Expenditure 9.8 3.155 (33.273 2.5 3.2 33.4) EBITDA margins (%) 33.5) 6.0 4.291 2.9 4.487 3.4 0.938 3.362 1.0 488 3.007 1.128 11.655 337 631 969 818 291 757 2.0 20.9 65.3 9.6 Employee 746 704 749 794 1.1) 1.905 428 744 1.649 3.9 18.170 27.103 2.1 15.3 3.8 3.0) #DIV/0! Source: Company.227 95.8 1.005 3.124) Interest 480 543 563 447 378 312 309 363 308 350 12.6 72.7 4.2 3.4 1.355 2.019 3.878 281 590 871 893 239 809 2.008 699 221 553 2.5 25. 2014 Shree Cements Quarterly Performance Trend Exhibit 2: Key Standalone Financial trend Financials (Rs mn) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Net Sales Mar-14 Jun-14 Sep-14 YoY % QoQ % 14.9 18.2 (12.426 3.0 0.365 3.300 1.0 13.4 3.741 2.2 7.7 10.4 16.087 4.404 36.0 29.5 0.290 4.544 333 385 719 735 244 756 2.5 18.4 3.6 795 3.8 0.863 1.4 3.490 12.553 13.2 17.206 3.454 1.714 1.085 1.311 4.130 2.9 3.332 1.5 44.6 49.227 3.7 20.6 7.567 16.1 0.076 1.171 700 232 617 2.790 1.1 (772) (1.7 26.167 2.1 13.315 3.365 1.5 786 4.9 20.811 3.109 (37.090 3.2 26.3 20.1 722 4.7 536 3.5 (22.5) Depreciation 818 942 818 1.481 1.4 6.123 3.494 2.4 (9.7 81.2 118 (532) Other Income 322 292 323 424 837 740 99 497 515 281 (62.136 1.981 10.5 0.300 10.4) (56.429 14.8 12.7 3.623 3.238 14.832 1.3 307 4.3 11.284 2.4) (0.842 4.341 2.3 3.615 9.655 2.2 Power Power Sold (mn units) Net Realization (Rs/unit) Opex (Rs/unit) EBITDA (Rs/unit) Power share of total EBITDA (%) 17.3) (54.3 23.0 3.1 21.187 2.294 2.3 3.538 2.265 1.8 417 3.875 2.1 (0.4 409 3.5 21.057 1.7 Taxes 320 454 365 176 159 50 153 494 3.9 0.0 3.6 23.4 5.7) 390 4.388 3.6 8.6 EBITDA 4.3) (54.335 306 525 830 765 311 759 2.135 37.141 3.1) (45.476 12.475 13.6 10.339 12.9 26.4 22.1 19.1 Raw Materials 1.563 10.8) (63.462 2.4 3.717 4.1 0.7) 3.1) EBIT Net Profits PAT margins (%) EPS (Rs) Source: Company.7 24.818 3.222 3.3 3.095 1.6 13.9 9.1 29.013 1.0) (16.492 1.8 65.3) Power and Fuel 3.015 402 585 987 856 273 716 2.4 3.7 6.434 265 576 841 817 294 763 2.7 12.7) EBIT margins (%) 29.733 1. Karvy Stock Broking Exhibit 3: Operational Analysis –quarterly across Cement and Power divisions Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 YoY % QoQ % Cement Total Sales vol (mn mt) Trends (Rs/mt) Net sales realization (NSR) Raw material cost Power and fuel cost RM and Fuel combined Transport cost Employee cost Other expenses Operating cost EBITDA 3.014 1.139 1.677 27.649 16.9 (2.0 3.9 15.381 2.474 2.665 670 3.1 0.715 719 3.2 (670) (800) 100.2 (33.308 31.156 1.515 1.2) Others 1.9 7.1 65.179 12.222 10.0 (1.493 2.2 Transport 2.323 3.741 9.280 14.0 19.651 950 3.705 4.3 16.8 22.395 2. Karvy Stock Broking 2 .4 3.937 18.3 16.733 380 594 974 765 251 725 2.183 3.9 78.

0 1.101 17.0 16.199 4.600 1. During FY15-16E.6 0.7 (32.5 0.0 2.1 0.9 13.7 6.925 3.5 0. Karvy Stock Broking Exhibit 5: Estimates Revision Summary Y/E Jun (Rs mn) Net Sales FY15E FY16E FY17E Revised Estimates 75.44 3.686 110. It also increased its WHR capacity by 80% to 81 MW over the last 3 years thereby boosting its operational cost efficiency.0 (1.2 14.3 4.8) 2.982 25.3 11.285 371 618 856 304 831 2.6 2.1 3.4 Cement & Clinker Sales Sales Volume (mn mt) YoY Growth (%) Trends (Rs/MT) Net sales realization Raw material cost Power and Fuel cost Freight cost Employee cost Other Expenses Opex EBITDA (RHS) Merchant Power Sales Sales volume (mn KwH) YoY Growth (%) Net realization (Rs/KwH) Opex (Rs/KwH) EBITDA/KwH Power Share of total EBITDA (%) Source: Company.2) (2.000 1.543 3.4 17.7) 3.3 0.421 19.055 4.105 1.582 374 630 893 325 883 3.6 4.5 respectively and cut NSR by 1% each 0.879 FY15E FY16E % Revision 2.805 1.4) (12. Shree Cement will increase its clinker capacity by 2 mn MT and grinding capacity by 2mn MT at Raipur (Chhattisgarh).2) (25.9) Adjusted PAT 10.469 1.749 933 3.860 (28.466 1.0 3.2) (2.311 65.027 1.5) 1.1) Source: Company.2 1.5 4.3 3.3 4.610 97.502 30.948 371 598 827 282 802 2.899 1.000 1.3) FY17E Comments 0.2 (0.4 4.354 1. 2014 Shree Cements Outlook and Valuations Exhibit 4: Key operational estimates FY12 FY13 FY14 FY15E FY16E FY17E 14.040 3. Karvy Stock Broking Outlook and Valuations Aggressive Capex in FY14-15E: Shree Cement has been continuously expanding its cement and power capacities.2) (8. Another grinding unit of 2 mn MT is expected to be commissioned in UP by Dec’2015 (FY16E).5 3. 3 .194 (11.812 5.9) leads to PAT downgrades (1.8) Higher depreciation and lower other income (5.942 91.4 Raised volume estimates by 5%/2%/1% 0.322 152.0 21.155 29.4 0.558 12.2) 0.355 1.9 (3.7 14.0 Higher depreciation to factor in capex (26.8 Operating expenditure EBITDA Depreciation Other income 56.005 (10.9 8.3 3.521 8.510 401 689 613 215 552 2.3) impact.268 17.220 26.484 2.5 mn MT grinding unit in Panipat (UP) from JPA will be amalgamated in the standalone company by Dec’2014.450 11.5 mn MT to 23 mn MT (70% increase).8) 1QFY15 trend.879 1. These will be commissioned by end of FY15E.7 0.9 3.979 1.3 3.46 4. The recently acquired 1.049 3.466 6.8 4.433 77.293 4.415 20. 0.0 0.6 12.6 2. During FY13-16E its cement capacity would expand by 9.9) EBIT Interest expenditure PBT Tax 12.8 4.0 (28.691 316 561 761 277 834 2.654 313 553 683 271 779 2.3 1.25 14.4 22.0 19. Lowered other income in-line with (1.255 21.067 33.November 11.3) (2.5 4.

Shree Cement should deliver 15% cement volume CAGR during FY14-17E.5x/4x) their FY17E EBITDAs respectively on account of its cost leadership despite its fast pace of expansion.760 (earlier 9. central and eastern regions by end of FY16E. These should drive its 34% EBITDA CAGR. 2014 Shree Cements Strong Franchise but rich valuations. We value Shree’s cement/power businesses at 9x/5x (earlier 8. Downgrade to “HOLD”: Driven by its aggressive but cost efficient expansions. 4 . With limited upside on CMP we downgrade the stock to “HOLD” from “BUY”.300) and implies EV per MT of USD180 (FY17E). Shree will have diversified and major sales presence in the northern. This leads to SOTP value of Rs9.November 11.

498 16.942 6. Karvy Stock Broking 5 .333 1.292 8.609 87. 2014 Shree Cements Exhibit 6: Profit & Loss Statement (Standalone) Y/E Jun (Rs mn) FY13 FY14 FY15E FY16E FY17E Net Revenues % growth 55.300 182 30.819 6.898 92.805 1.000 77.5 4.761 47.474 100.164 10.424 348 7.155 29.698 35.394 44. Karvy Stock Broking Exhibit 7: Balance Sheet (Standalone) Y/E Jun (Rs mn) FY13 FY14 FY15E FY16E FY17E Cash & liquid equivalent Debtors Inventory 25.255 10.0 4.484 1.211 348 11.255 7.982 78.502 17.092 1.827 3.675 10.1 Source – Company.814 122.866 1.November 11.160 1.000 1.029 Source – Company.171 100.9) 5.498 70.415 20.849 10.966 8.563 6.521 40.866 4.109 73.076 46.421 19.521 8.029 21.6 58.155 10.931 11.098 31.864 5.076 38.067 33.665 86.9 Operating expenditure EBITDA % growth Depreciation 40.000 EBIT Interest expenditure Other income PBT 1.7 110.005 98.355 1.433 21.632 Loans & advances Investments – Long term Gross Block Net Block 6.450 11.898 18.686 20.6 6.894 20.636 100.180 5.675 46.792 45.116 38.6 2.305 24.147 5.158 1.194 25.360 348 14.585 1.812 27.305 61.942 29.545 348 11.469 14.898 (10.466 35.076 31.466 92.2) 1.464 61.612 122.845 113.870 3.220 26.5 8.892 69.8 5.911 CWIP Miscellaneous Total assets Current liabilities & provisions 1.586 (14.5 280 8.291 15.215 348 Reserves & surpluses Total networth Total networth & liabilities 38.911 5.954 73.879 20.911 5.000 1.883 13.076 21.005 39.037 2.101 17.940 59.999 182 26.027 65.975 13.899 1.354 1.199 Tax Adjusted PAT / Net profit % growth 1.800 182 29.603 18.938 4.469 54.873 5.233 Debt Other liabilities Total liabilities Shareholders' equity 12.882 74 23.745 7.000 1.605 54.311 12.543 30.0 91.126 70.3 75.590 56.403 17.953 86.800 182 31.

0 RoCE RoIC RoE 26.6 17.4 18.500) - 1.7 20.878) (5.450) 862 2.833 (1. Karvy Stock Broking Exhibit 9: Key Ratios Y/E Jun (%) FY13 FY14 FY15E FY16E FY17E EBITDA margin EBIT margin 27.000) (966) 22.2 37.543) Other non cash items Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments (37) 12.0 14.402 (966) 21.1 (0.2 52.0 717.6 Source – Company.000 28.817) 77 (895) 231 (1.144) (1.5 5.9 28.0 3.935) 5.000) Others Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity 716 (2.212 6.5 19.096) (1.075 (15.2 20.223) (1.1 19.356 8.8 35.428 (20.415 (2.499 11.3) 0.3) 1.1 28.November 11. 2014 Shree Cements Exhibit 8: Cash Flow Statement (Standalone) Y/E Jun (Rs mn) FY13 FY14 FY15E FY16E FY17E PBT Depreciation 11.8 15.2 30.1 19.500) - Dividend paid Interest paid Cash flow from financing activities Net change in cash (690) (366) (9.9 25.762) - 1.0 246.457) (3.995) (8.956 5.591 (8. Karvy Stock Broking Exhibit 10: Valuation Parameters Y/E Jun FY13 FY14 FY15E FY16E FY17E EPS (Rs) DPS (Rs) 287.5 27.927 5.9 13.306 (19.4 6.5 22.804) 1.934) (4.6 5. Karvy Stock Broking 6 .8 5.801 - 1.410) (644) (1.8 28.538 (26.311) 1.0 8.7 (0.205) 3.4 Net profit margin Dividend payout ratio Net debt: equity Gross block turnover 18.410) (5.567) (3.088 (12.995) (15.450 (1.7 30.019) (1.4 11.6 3.0 8.155 (4.2 4.6 10.000 Interest Tax paid (Incr) / decr in net WC Other income 1.003) (1.7 21.9 30.565) 1.8 32.104 1.0 Book value per share (Rs) 1.9 23.452) (278) (1.7 16.3) 1.3) 1.3 10.3 25.084 8.6 6.4 33.0 22.292 (556) 1.9 17.9 8.155) (5.1 (0.522 (807) 14.339) (894) - 1.8 47.996 (1.1 54.9 4.104) 2.7 30.829) 2.198 4.5 31.333 (12.027 20.007 (15.2 EV/Sales (x) 5.2 2.9 12.0 19.433) 1.0 289.002) Source – Company.7 33.5 EV/mt(USD) 387 293 242 215 205 P/E (x) P/BV (x) EV/EBITDA (x) Source – Company.8 (0.5 23.023 2.558) 110 (489) (1.4 (0.415) (5.352 1.697) (8.9 23.000) (966) 27.4) 1.931 (2.0 516.187 (1.497 (13.577 2.664 32.

Karvy Stock Broking Limited Office No. however. is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. 7th Floor. who is (are) primarily responsible for this report. Street No 1. if any. We. Thomson Publisher & Reuters. The information contained herein is based on our analysis and upon sources that we consider reliable. investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. 2014 Shree Cements Stock Ratings Buy Hold Sell : : : Absolute Returns > 15% 5-15% < 5% For further enquiries please contact: research@karvy. certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was. 701. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. or any options.KRVY <GO>. Hyderabad – 500 034. futures nor other derivatives related to such securities. While acting upon any information or analysis mentioned in this report. do not vouch for the accuracy or the completeness thereof. 7 . directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. as they believe necessary. Karvy Stock Broking Research is also available on: Bloomberg . The author. Opp. Banjara Hills.November 11. to buy or sell any securities. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice.-Gurunanak Hospital. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades. Mumbai 400 051 Regd Off : 46.com Tel: +91-22-6184 4300 Disclosures Appendix Analyst certification The following analyst(s). Road No 4. This report is intended for a restricted audience and we are not soliciting any action based on it. Hallmark Business Plaza.