Shree Cement Q3FY12 Result Analysis And Update

Shree Cement, one of the major cement manufacturing and power companies, has announced its Q3FY12 result. The company reported robust topline as well as bottomline growth on YoY and QoQ basis. The net sales of the company grew by a whopping 61 per cent on a YoY basis to Rs 1,259 crore. The best part of the result was the growth in the bottomline of the company which, despite higher power and fuel prices (up by 57 per cent YOY) and freight charges (up by 28 per cent), grew by 115 per cent on a YOY basis to Rs 59.19 crore.

The EBITDA margins of the company improved by 600 bps to 26.47 per cent on a YOY basis due to better margins in the cement division. If we look at segment-wise performance, the cement division has done much better than that of the power business. The power division is continuously making losses at its EBIT level while the cement division on the back of higher realisation and some pick-up in demand during the quarter has performed robustly. The company has a large presence in North India which has seen decent improvement in demand post monsoon. 

Due to the commissioning of the new power plant during the quarter, the revenue contribution from the cement business has come down from 90 per cent in September 2011 to 78 per cent in December 2011 to Rs 1,081 crore. Although contribution from the power business grew from 9 per cent in September 2011 to 21 per cent in December 2011 to Rs 301 crore, it continues to remain a loss-making division.

Moreover, the QoQ performance of the company was also quite good. The company reported a jump of 47.15 per cent QoQ largely due to the pick-up in demand and higher realisation of the cement business during the quarter. The higher realisation also helped the company to report better margins despite the increase in input cost such as power & fuel and freight which increased by 60 per cent and 38 per cent respectively. The EBITDA margin on a QoQ basis improved by 290 bps to 26.47 per cent.  However, due to the increase in interest cost up by 27 per cent on a QoQ basis, the net profit improved by 20 bps to 4.69 per cent QoQ.

The cement companies post-monsoon have seen some pick-up in demand which was in tandem with the prices that also increased during the quarter across all the regions barring the south where the prices remained flat or have seen a marginal improvement largely due to production discipline.

Going forward we expect the company to post decent numbers in Q4FY12 mainly on account of the further pick-up in demand from the infrastructure and construction activity which also cyclically remains the best quarter for the cement sector. Also, any change in coal price by Coal India will not impact the company as it does not have any coal linkages with it and neither with the local traders. Therefore we believe any further push in pricing by the other players will benefit the company in terms of its profitability. 

At the current market price of Rs 2,198 the scrip is trading at a P/E of 35x at a trailing EPS of Rs 62. The valuation looks quite high as compared to other peers like Ultratech (15x), Ambuja (20x) and ACC (19x) which are currently trading at lower PE valuations. However, we believe that the company will do better in the coming quarter on the back of the growing demand and better realisations. Therefore given the expected growth and discounting the poor performance of the power division we believe there is still some upside potential in the scrip to the extent of 7-12 per cent.