Accumulate Shree Cements; target of Rs 4700: Emkay

Emkay Global Financial Services is bullish on Shree Cements and has recommended accumulate rating on the stock with a target of Rs 4700 in its January 22, 2013 research report.

“Shree’s Q2FY13 EBITDA at Rs 3.71bn, +12% yoy came in line with estimates. EBITDA from cement business at Rs3.04 bn, -4% yoy was slightly below est of Rs3.15bn led by lower realizations which at Rs3723/t declined 2% yoy & 4.6% qoq (vs estimate of Rs3799/t). However the impact was negated by a solid performance delivered by the power segment with EBITDA at Rs670mn (vs est of Rs540mn), +415% yoy. Power revenues grew 173% yoy led by 2X jump in volumes (786 mn units). Even as power realisation declined 11% yoy, lower petcoke prices helped EBIDTA/unit which at Re0.85 improved 8% yoy.” 

“On the cost front, freight costs/t increased by 9% qoq as the full impact of road freight hike (on account of diesel price hike in late Sept) was visible during the quarter. The impact was partially negated by substantial reduction witnessed in the P&F costs which declined 21% qoq to Rs592/t led by decline in international coal/petcoke prices (weighted avg fuel cost/t declined 11% qoq). Resultant total costs at Rs2706/t declined by 1% qoq well under control. However decline in realisation impacted cement profitability with EBITDA/t at Rs1017/t down 9% yoy and 14% qoq below estimates of Rs1049/t. Other expenses increased 23% yoy and 16% qoq to Rs2.16bn (higher than est of Rs1.9bn) as 2 major maintenance costs increased stores & spare expenses by Rs240mn.” 

“Shree plans to increase its cement grinding capacity from current 13.5 mtpa to 18.5 mtpa by setting up a 5mtpa grinding units and 3 mtpa of clinker capacity at Ras, Rajasthan and Bihar. This would be completed in 2 phases by early FY15. Though Shree’s growth in near term is likely to remain muted (cap constraints & muted cement price uptick), Capacity ramp up plans to 16mtpa/18.5mpt by FY14/FY15 & limited capacity addition in North (Capacity addition of only 12 mtpa over FY12-15. Region would be first to achieve demand supply equilibrium) provides long term growth visibility. Stock valuations at 7.4X EV/E & USD152 EV/T for FY14 numbers remains reasonable. Maintain accumulate with revised target price of Rs4700 (Rs4420 earlier) valuing the stock on 7.5 EV/EBIDTA for average of FY14E & FY15E EBIDTA estimates,” says Emkay Global Financial Services research report.

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