Sell Shree Cements; target of Rs 2417: FinQuest Securities

“Shree Cement is the best in the cement pack when it comes to operational parameters and has presence in the markets (Rajasthan and NCR) where the demand is fairly strong compared to the other regions. However the cement prices have started correcting even in these markets. Although we believe that the cement demand growth will improve going ahead and that would improve the demand supply dynamics, pricing is a major concern as a result we may witness sequential fall in revenue and profitability. We believe that at some point there would be government intervention in some form or the other to control or even reduce price while the investigation pertaining to cartelization by CCI present incremental uncertainty. We believe that the volume growth for both cement and power division to continue as a result we marginally revise our FY13 revenue estimates from Rs 54.77 bn to Rs 55.24 bn. However considering margin pressure we revise our EPS estimate for FY13 downward from our earlier estimate of Rs 168.7 to Rs 156.4.”

“The overall cement demand in India continue to be at a creepy phase, while the cost inflation is only expected to worsen given that CIL is under severe pressure to raise prices going ahead. Further increase in fuel (petrol and diesel) costs is expected to hike the freight expenses of the cement companies sharply. The cement prices across the country are currently quoting at all time highs. Thus the flexibility to pass on the cost increase from here on appears limited and could pressurize the margins going ahead. At some point we believe that there would be government intervention to control prices. The regulatory uncertainty with regard to the investigation by Competition Commission of India (CCI) on cartelization charges by cement major is another major overhang.”

“We see significant increase in cost pressure due to higher coal prices and freight expenses, which we estimate to growth significantly for the company. We had initiated coverage on the stock on 23rd November 2011, with a one year price target of Rs 2417. The target was achieved on 8th February 2012. While we continue to be positive on the cement industry macro, we believe that Shree Cement's stock price has run ahead of valuations. It is also not factoring in the risk related to further increase in pet coke price and potential penalty arising out of the investigation by CCI. Besides going ahead as we enter the monsoon season we would witness some fall in realization. We revise our rating from 'Buy' to 'Sell' while maintain our target price of Rs 2417. (Cement business valued at EV per tonne of USD 120, PE of 15.5x and EV/EBIDTA of 6.3x FY13E earnings). We cite imminent margin pressure due to further fuel price increase, probable penalty from CCI investigation and limited pricing power for the industry from these levels. At the current market price of Rs 2650 the stock is trading at PE of 16.9x and EV/EBIDTA of 6.9x FY13 earnings,” says FinQuest Securities research report.

Non-Institutions holding more than 90% in Indian cos

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