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  1. Analyst Corner: Shree Cement riding high on strong volume growth

Analyst Corner: Shree Cement riding high on strong volume growth

At Rs 6.5 billion (Citi Rs 6.9 billion), Q1 adjusted Ebitda fell 10% year-on-year — volume growth and higher power Ebitda offset by lower realisation and higher costs.

By: | New Delhi | Published: August 1, 2018 12:51 AM
Shree Cement riding high on strong volume growth

At Rs 6.5 billion (Citi Rs 6.9 billion), Q1 adjusted Ebitda fell 10% year-on-year — volume growth and higher power Ebitda offset by lower realisation and higher costs. Cement Ebitda/t: Rs 860 against Rs 1,215 last year and Rs 955 in Q4.

Volumes rose ~19% year-on-year — strong growth in both regions (East > North). Capacity mix: North 75%, East 25%. With the commissioning of ~9 MT of capacities in the East, North and South during February-June 18, Shree’s capacity is now ~38 MT. According to reports (Livemint), Shree has plans to set up grinding units (7-8 MTPA) in Odisha, Jharkhand, WB (East) and Maharashtra (West). Citi volume estimate: FY19 +18%, FY20 +18%. Shree has completed the acquisition of 97.6% of the United Cement Company (UAE) — 4 MTPA cement, 3.3 MTPA clinker.

This compares to ACC at +5% and Ambuja/ULTC at +2%. The weakness against peers is attributed to higher exposure in the North — both ULTC and Ambuja suggested muted pricing in the North. Shree management also indicated that prices were weaker quarter-on-quarter in the North, stronger in the East. Current prices are higher than the June average in both regions.

1) Freight (~35% of total) rose 14% year-on-year — higher diesel prices. 2) Power/fuel (~30%) rose ~31% year-on-year — surge in petcoke prices. Other expenses include an FX loss of Rs 700 million on unhedged debt. We expect higher axle weight to benefit freight; we await clarity.

1) Potential pricing upside, 2) Cost likely close to peak; benefit of higher axle loading going forward, 3) Strong volumes. Cut FY19-21 Ebitda by 6-12% on lower realisations. We value Shree at 15x EV/Ebitda (against 16x earlier) roll fwd to Mar 20 from Sep 19; adjust for UAE acquisition. Top picks: Ambuja and ULTC (additionally we have opened a 90-day catalyst watch on ACC).

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