Published on 22/02/2020 11:16:40 AM | Source: Emkay Global Financial Services Ltd

Sell Shree Cement Ltd For Target Rs. 22,199 - Emkay Global

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Valuations discomforting; downgrade to Sell

* We downgrade SRCM to Sell as we believe that current valuations at 20.3x/17.8x FY21/22E EV/EBITDA leave no room for negative surprises. Current valuations are factoring in peak profitability and significant volume growth over the next two years.

* Q3 results were marginally above our estimates, with EBITDA at Rs8.49bn vs. Rs8.23bn estimate and OPM at 29.8% vs. 28% estimate. The beat in earnings were driven by higher volumes and lower opex (Rs90/ton below estimates) of the cement segment.

* Key positives: 1) volume growth of 5.3% yoy vs. estimate of 2.9% growth; 2) 14.5% yoy/13.6% qoq decline in energy cost; and 3) 6.1% yoy decline in freight cost. Key negative was the Rs30mn loss in the power segment against a profit of Rs570mn in Q3FY19.

* The company raised Rs23.83bn through a QIP in Q3, which would be used for capacity expansion, working capital needs and debt repayment. Grinding units of 3mt each in Cuttack, Odisha/Pune, Maharashtra would be commissioned by Q4FY20E/Q3FY21E.


Realization and lower opex support profits: SRCM benefited from higher cement prices in the North region as realization was up 4.6% yoy in Q3. Lower energy costs due to decline in pet coke prices and freight costs (down 6.1% yoy) helped the 3.1% yoy decline in opex/ton. Variable cost was down 5.6% yoy. Sales volume was up 5.3% yoy (6% growth in cement volumes while clinker volume was down 7.9%). Higher realization, sales volumes and lower opex led to 34.6% yoy growth in the cement segment’s EBITDA and 5.5pp yoy improvement in OPM. EBITDA/ton was at Rs1,365 vs. Rs1,067/Rs1,452 in Q3FY19/Q2. Lower realization (down 8.8% yoy) and volumes (down 84.7% yoy) resulted in an EBITDA loss in the power segment. For the company, EBITDA was up 23.1% yoy with 5pp improvement in OPM. Increase in interest/depreciation costs by 25%/28.6% yoy due to the commissioning of new plants and higher ETR (24% vs. 19.6% in Q3FY19) restricted profit growth at 10.2% yoy.


Raising estimates; downgrade to Sell: We raise FY20/21/22E profit estimates by 1.8%/4.3%/7.3%, factoring in lower opex in 9MFY20, although we have cut sales volumes by 4-5% for FY20-22E and realization assumptions by 1-2% for FY21/22E. The pricing behavior (after the steep hikes seen in Apr-May’19) in the North region has surprised for 10 months. We believe that the volume push by JK Cement and Wonder Cement needs to be monitored over the next few months. In FY21E, we expect SRCM’s realization to be lower than that of FY20E. SRCM raised Rs23.8bn through QIP during Q3; the use of funds for any expansion (organic or inorganic) needs to be seen as equity issuance, and it was a shift from management’s strategy of not diluting its stake. Valuations at 20.3x/17.8x FY21/22E EV/EBITDA appear expensive and leaves no room for disappointment. We downgrade rating to Sell with a TP of Rs22,199 (16x FY22E EV/EBITDA vs. Sep’21E earlier) and maintain UW position in sector EAP. Key risks are continued increase in cement prices in the North region and a significant jump in industry demand.


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