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Better realization in cement; Weak power performance
Shree Cement Limited provides building materials. The company manufactures and sells cement and cement products in India. The company currently operates with a total cement capacity of 44.4mpta of which 40.4mtpa is located in India. Total domestic power capacity for the company stands at 711 MW.
* Standalone revenue increased 2.4% YoY to Rs. 2,848cr in Q3FY20, missing the street estimates by 3.0%. Cement revenues were up (+10.1% YoY), offset by decline in Power revenues (-40.3%).
* EBITDA rose 19.6% YoY to Rs. 849cr with margins improving 430bps YoY to 29.8% driven by lower raw material cost and drop in power and fuel expenses. As a result, PAT was also up 2.9% YoY to Rs. 310cr.
* The company raised Rs. 2,400cr via QIP at issue price of Rs. 19,300/ share in November 2019.
* The stock price has rallied ~22.0% since Nov 2019. At current levels valuations looks expensive, thereby we downgrade our rating to REDUCE on the stock with a revised target price of Rs. 20,770 based on valuation multiple of 17x FY22E EV/EBITDA.
Q3FY20 performance at a glance
Total standalone revenue came in at Rs. 2,848cr, up 2.4% YoY, driven by growth in Cement segment, which more than offset declines in Power business. Cement dispatches increased 6.0% YoY to 5.94mn tonnes, driving its revenues to Rs. 2,818cr (+10.1% YoY). On the contrary, Power business declined to Rs. 300cr (-40.3% YoY). Sequentially too, Cement business increased 5.8% QoQ and Power business declined 28.5% QoQ. Operating profit from Cement business grew 81.1% YoY to Rs. 311cr due to better realization coupled with lower raw material cost and drastic drop in power and fuel expense in Q3FY20, while operating profit fro m Power business reported at Rs. 106cr (vs. Rs. 202Cr in Q3FY19).
Fund raising via QIP
The company raised Rs. 2,400cr via Qualified Institutional Placement (QIP) route at the end of November 2019. The QIP issue price of Rs. 19,300 was at a discount of 2.6% or Rs. 506 per share compared to the floor price of Rs. 19,806. As a result, the company allotted additional 12.43 lakh equity shares.
* Company plans to commission a 3.0mtpa cement grinding unit in Odisha in FY20 and another 3.0mtpa unit in Maharashtra by FY21. Post expansion, total cement capacity is expected to reach 50.4mtpa including UAE and installed power capacity to ~741MW.
* Company expects cement demand to remain muted amidst challenging economic environment. However, government emphasis on infrastructure in recent budget and good monsoon could lift the cement demand, in turn benefitting the cement industry.
* Management declared an interim dividend of Rs. 110 per share including a special dividend of Rs. 40 per share. Valuation The company’s is expected to benefit from capacity expansion, good monsoon and emphasis by government on infrastructure. However, the stock had a run of ~22% from Nov 2019 and at current level looks expensive. We downgrade our rating to REDUCE with a revised target price of Rs. 20,770 based on 17x FY22E EV/EBITDA.
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