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Lower costs led the beat; Maintain HOLD
Shree cement (SRCM) reported Q4FY19 earnings ahead of our expectation on the back of lower expenses. EBITDA/t rose 15.4% YoY to Rs1,103 above our estimate of Rs1,096. Led by strong organic growth (12.4% CAGR in capacity over FY19-FY21e) and efficient operations, we expect SRCM’s earnings to grow at CAGR of 15% in FY19-FY21e. An increased focus on high margin trade segment (+6% YoY/+2% QoQ to 73% in Q4FY19) is expected to fetch better realisations. However, increase in realisations are at a cost of marginal loss in volumes due to surging capacity addition and intense competition. We have increased our EBITDA estimates for FY20e/FY21e by 0.5%/10.3% to factor in higher realisations and improved cost efficiencies. We maintain HOLD rating with TP of Rs19,370 (Earlier Rs16,824).
* Cement biz- lower expenses drove the beat:
Realisations (adj. for freight) remained flat QoQ (+8.8%/Rs258 YoY) at Rs3,163 (PLe:Rs3,186)/t. Led by lower than expected expenses (lumpy in nature), cost/t (adj. for freight) came in below our estimate at Rs2,061 (PLe:Rs2,090). 13% volume growth and 15.4% expansion in unitary EBITDA drove 35% YoY growth in EBITDA at Rs8.48bn (PLe:Rs8.17bn).
* Power biz- earnings in line with expectations:
Led by higher than expected realisations partially offset by lower than expected volumes, power biz reported earnings in lines with our expectation. EBITDA came in at Rs430mn (PLe:Rs440mn) v/s Rs138mn/Rs570mn in Q4FY18/Q3FY19, with margins at Rs1.13/unit (PLe:Rs1.0/unit).
* PAT hit due to higher depreciation and lower other income:
PAT fell at 20% YoY to Rs3.2bn (PLe:Rs3.9bn) due to 80% YoY increase in depreciation (due to commissioning of Kodla (Karnataka) unit in Dec’18) and 57% YoY fall in other income.
* Key earnings call highlights:
1) Cement demand is fairly stable and expected to grow 7-8% in FY20e, however it may witness slowdown in the coming quarter due to elections; SRCM to grow 11-12% YoY in FY20e (+14.8% YoY in FY19) 2) Cement prices are Rs30-35 QoQ higher in Q1 3) SRCM's utilisation for Q4FY19 are at 78%; North/East/South unit operated at 78%/100%/30-35% utilisations; South unit will reach 60% utilisation in the next 2-3 quarters 4) Commissioning of 2.5m/3m tonnes of grinding units at Jharkhand/Odisha are expected by 15-20 days/Sep'19 5) New capex of Rs5.25bn to setup 3m tonnes grinding unit at Pune (Maharashtra) to be commissioned by Q3FY21e; May announce 3rd clinker line at Chhattisgarh plant in the coming quarters 6) Rs15- 16bn capex guidance for FY21e (Spent Rs40bn in FY19); ~Rs2bn annual maintenance capex 7) Shift in focus since last 2-3 quarters to improve high margin trade sales across regions as compared to low margin institutional sales; Trade Sales rose to 73% in Q4FY19 v/s 67%/71% in Q4FY18/Q3FY19 8) Pet coke prices are stable at US$95-100/t and expected to remain flat QoQ in Q1 9) UAE based operations (Union Cement) operated at 13ktpd in Q4 with EBITDA margins of 16.5%; expecting to maintain EBITDA margins at same levels despite pricing pressure 10) Rs2.57bn incentives received in FY19 (Rs0.37bn/Rs2.68bn in Q4FY19/FY18); Expected to receive Rs2.5-2.7bn subsidy in the next 1-2 years.
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