Sell Shree Cements; target of Rs 3390: FinQuest

FinQuest Securities is bearish on Shree Cements and has recommended sell rating on the stock with a target of Rs 3390 in its October 18, 2012 research report.

“Cement volumes increased substantially Y-o-Y although on Q-o-Q basis it was lower since demand subsided towards the end of the quarter as monsoon intensified in the company's major markets. The cement prices too softened during this period. The power segment of the company which increased its total capacity to 560 MW witnessed stellar performance during the quarter under review. Overall the revenue rose 55% Y-o-Y (lower by 9% Q-o-Q) to Rs 13.24 bn in Q1FY13. The company witnessed significant savings in operating cost which caused 620 bps Y-o-Y improvements in EBIDTA margin to 29.8%. As a result the absolute EBIDTA improved 97% Y-o-Y to Rs 3.94 bn.”

“Shree Cement has been aggressively expanding its capacity in the past few years in both cement and power divisions and its market leadership position in the northern region where the demand and price have remained fairly firm has relatively helped the company to outgrow the industry consistently. Integrated operations have enabled the company to post significantly higher operating efficiency than its larger peers in India. However overall we see macro concerns for the cement industry despite the recent reform acceleration by the government. The growth in cement dispatches continues to happen at creepy phase as a result we are concerned about the sustainability of the current cement realization going ahead. We also see cost pressure going ahead driven by higher power & fuel cost and freight expenses.”

“We expect the company to maintain its cost leadership position in the cement industry, while it would witness significant ramp-up in its power business. We believe there would be pickup in pre election spending in several states in the next 12 months while the demand supply mismatch would narrow in favor of demand as the capacity expansion slows down. At the current price of Rs 4049, the stock is trading at PE and EV/EBIDTA of 15.3x and 8x FY13E earnings. While we continue to be positive on Shree Cement we are a bit worried about the cement industry macro at this point as the demand growth continues to remain weak. We believe Shree Cement has run ahead of its valuation even after considering increased cement replacement cost of USD 140 per tonne to value its cement business. We maintain our 'sell' rating on the stock with an increased price target of Rs 3390,” says FinQuest Securities research report.

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