Shree Cement’s (SCRM’s) result reflects the benefit of improved pricing in north as Ebitda/t was strong as expected. Costs are also coming down. We maintain our FY20/21 EPS estimate and Neutral rating. While the margin outlook appears strong given recent price hikes, we believe valuations (18x FY21e EV/Ebitda) already capture the expected gains.
Marginal miss due to higher freight cost
Volume increased 5.3% y-o-y to 6.25mt in Q3FY20. Realisations were up ~4.6% y-o-y (-3% q-o-q) at Rs 4,512/t (in-line). While cement revenue grew 10% y-o-y to Rs 28.2 bn, power revenue fell 86% y-o-y to Rs 308 m, leading to in-line overall revenue of Rs 28.5 bn (+2% y-o-y). Total cost/t of Rs 3,147 (-3% y-o-y/-2% q-o-q) came in higher than our estimate of Rs 3,096 due to a rise in freight cost to Rs 1,031/t (+2% q-o-q). Cement Ebitda/t was thus 4% below our estimate at Rs1,365 (+28% y-o-y). Power business reported Ebitda loss of Rs 30 m (v/s profit of Rs 576 m in Q3FY19) due to lower units sold at 68 m (-85% y-o-y, -81% q-o-q). Ebitda thus grew 23% y-o-y to Rs 8.5 bn (our estimate: Rs 8.9 bn), with the margin at 29.8% (+5pp y-o-y). Tax rate stood at 24% for Q3FY20 v/s 19% in the year-ago period. PAT was up 3% y-o-y at Rs 3.1 bn (our estimate: Rs 3.5 bn).
Highlights from management commentary: Premium cement sales increased to ~10% of volumes, aiding margin improvement. Lead distance increased marginally, resulting in higher freight/t cost. Power revenue was impacted by weak demand and low merchant power tariff. Near-term outlook is muted too. South plant is operating at 45% utilisation and ramp-up would be gradual. Commissioning of the Pune grinding unit in Sep’20 should support faster ramp-up in 2HFY21.
Valuation and view: While the outlook for north remains strong, SRCM’s increasing exposure to east (post new capacities commissioned) would likely moderate gains in margins due to the muted pricing outlook there. East region is likely to witness ~25% capacity expansion by various players (including Shree) over the next 18 months, which would likely create a fight for market share. We value SCRM at 14x Dec’21e EV/Ebitda and add value of the UAE operations at $70/t to arrive at a target price of Rs 22,810. The stock trades at 18x FY21E EV/Ebitda, which is a premium to its past 10-year average. It also trades at ~40% premium to its large-cap peer UltraTech as against the past-five-year average of ~15%. Maintain Neutral.