Accumulate Shree Cements; target of Rs 3850: Emkay

Emkay Global Financial Services is bullish on Shree Cements and has recommended accumulate rating on the stock with a target of Rs 3850 in its August 24, 2012 research report.

“Shree Cement continued its streak of beating street estimates and delivered solid 5QFY12 performance with a stellar EBIDTA growth of 86% yoy to Rs4.81 bn significantly ahead of our & street estimate (Emkay est Rs4 bn, Consensus at Rs3.8 bn). Shree’s EBIDTA/t at Rs1320/t has grown 50%yoy (+11% qoq) significantly ahead of estimates of Rs1140/t led by lower costs. Cement revenues (Rs12.8bn) grew 40% yoy led by impressive volume growth of 25% yoy (3.37 mnt) while cement realizations at Rs3806/t improved 11.8% yoy & 5.4% qoq. Net power revenues at Rs1.73bn, +70% yoy driven by 64% increase in power volumes (390 mn units) while power realisation grew 4% yoy to Rs4.44/unit.”

“Shree’s superior quality of quarterly performance is clear from the fact that its amongst few companies where EBIDTA growth is largely driven by volumes (+25% yoy) and improving production mix (Clinker as % of total volumes at 4.9% as compared to 9.8% in June-11 quarter). The quality is further enhanced by Shree’s improving cost as total costs at Rs2486/t (vs est of Rs2673/t) declined -2% yoy helped by improving energy efficiencies and lower petcoke prices. A P&F cost at Rs608/t was up +7% qoq despite 10- 12% sequential increase in petcoke prices. Freight costs also surprised positively with decline of 1.3% qoq (Rs699/t vs est of Rs740/t) despite 23% rail freight hike (Rail dispatch share at 25%) implying better logistic cost management by selling in local markets.”

“Shree plans to increase its cement capacity from current 13.5 mtpa to 15.5 mtpa by Dec- 13. The company will add 3 mtpa of clinker capacity through unit IX & X at its current location in Ras, Rajasthan expected to be completed by June 2013 and June 2014. Cement expansion would be completed in phases with the first grinding unit of 2mtpa at Bihar expected to be commissioned by Dec-13 and second 1mtpa grinding unit at Rajasthan by June -14. With a stellar performance in June quarter, shree has continued its streak of beating street estimates. Further with current healthy cement realisation we do not rule out possibility of further upgrades and hence see continued stock out-perfomance, despite the recent (3 months) out-performance of 21%."

"Stock trades at 5.8X EV/EBITDA and USD114 EV/T for FY14 numbers which we believe are attractive considering Shree’s superior profitability (5Q EBITDA/t of Rs1320, highest in industry) and impressive 10% EBITDA CAGR over FY12- 14E period. Maintain accumulate,” says Emkay Global Financial Services research report.

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