* Shree Cement’s operating performance is below our estimate, with adjusted EBITDA at Rs4.7bn (adjusted for subsidies/DMF provision reversal of Rs600mn/Rs400mn) against estimated Rs4.9bn. EBITDA/tonne of cement stood at Rs892 (Emkay Estimate: Rs887).
* Sales volume of Cement grew by 8.3% yoy to 5.33mt. Realization was up 8.4% yoy. EBITDA from the Cement segment declined by 5% yoy due to higher opex (freight and energy costs). EBITDA/tn stood at Rs893 against Rs1,018/Rs1,010 in Q3FY17/Q2FY18.
* Shree Cement also announced the acquisition of Union Cement Company, UAE at EV/EBITDA of 8.8x and EV/tonne of US$76. The acquisition will be EPS accretive from 1 st year itself, though RoCE will be lower than existing operations. However, RoCE of 6.4% is almost equal to current yield on investments with scope for improvement.
* We downgrade FY18/FY19E/FY20E EPS estimates by 17.6%/13.3%/13.1% to factor in higher energy costs. We prefer Shree Cement due to its efficient cost structure and superior capital allocation. Maintain BUY with a PT of Rs22,001.
Higher costs impact profitability of both segments
Shree Cement’s Q3FY18 numbers are marginally below estimates, with an EBITDA of Rs4.7bn (adjusted for Rs600mn of subsidies recognized in revenue of Cement and DMF reversal of Rs403mn) against an estimate of Rs4.9bn. Realization of the Cement segment was up 8.4% yoy (but down 1% qoq) to Rs4,007/tn (vs. estimated Rs3,946/tn). Sales volume of Cement + Clinker grew by 8.3% yoy to 5.33mt (Emkay estimate: 5.35mt). Opex/tn of cement was up 16.4% yoy on account of higher energy cost (due to an increase in Petcoke prices and ban on Petcoke in Rajasthan) and elevated freight cost (owing to ban on overloading in North/Central regions). EBITDA of Cement segment declined by 5.1% yoy to Rs4.7bn. EBITDA/tn came in at Rs892 against Rs1,018/Rs1,010 in Q3FY17/Q2FY18. Sales volume of the Power segment was up 3.5x yoy, benefitting from a low base of last year (due to demonetization). However, the ban on Petcoke in power plants led to a loss of Rs55mn against a loss of Rs101mn in Q3FY17 and a profit of Rs78mn in Q2FY18.
Downgrade earnings estimates; maintain BUY
We downgrade FY18/FY19E/FY20E EPS estimates by 17.6%/13.3%/13.1% to factor in higher energy costs. We have included subsidies into EBITDA as per the change in reporting standards (in earlier format, EBITDA cut would have been 8-11% for FY18-FY20E). Shree Cement has planned capacity expansions in the East, North and South regions, and aims to become a 40mt capacity company by FY20E. It remains one of the most preferred companies in our coverage universe due to cost efficiencies, lower capital cost for expansions and planned capacity expansion in the next few years (without leveraging the balance sheet) and geographical diversification. The stock trades at 25.7x/19.4x/15.2x FY18E/FY19E/FY20E EV/EBITDA. We maintain BUY with a revised PT of Rs22,001 (16.8x FY20E EV/EBITDA)
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