Shree Cement (SRCM IN)

Transcription

1 INSTITUTIONAL EQUITY RESEARCH Shree Cement (SRCM IN) Further valuation re rating demands calibration of approach by The King of North 6 August 215 INDIA CEMENT Quarterly Update Shree Cement (Shree) has once again proved its cost competencies vis à vis all peers and its June 16 quarter numbers in our opinion will remain far superior vs. any other regional player. At an EBITDA/tonne of ~Rs671, Shree has demonstrated its capabilities of generating reasonable profit margins despite the worst of pricing scenario. Shree s capabilities to operate on the lowest end of the cost curve remain undisputable. However, we believe the next drive for re rating of valuations (currently at ~US$23/tonne) will be driven by Shree s calibration of approach towards volumes as well as pricing. As and when we see Shree s operations in East India settling down, in our opinion, we may expect Shree s realisations to see a material improvement. Shree can very easily touch the benchmark of Rs1,/tonne of EBITDA with a marginal improvement of ~Rs15 2/bag in realisations and which we believe is already factored in the current valuations. But for a re rating of valuations (say EV/tonne of US$3), EBITDA/tonne needs to improve significantly from current levels. Shree has an inherent potential to reach new benchmarks on operating front and we believe this will eventually happen with minor adjustments in its approach. In nutshell, we believe the next drive for valuation at Shree will emerge from material improvements in its price realisations (beyond Rs15 2/bag). Given the current market conditions in North we continue to maintain our Neutral rating at Shree with a price target of Rs11, ( 6%). Cost competencies at Shree are indisputable: Shree s operating performance continues to remain far superior vis à vis peers. Moreover on volume growth front, Shree continues to remain a rare regional cement major which has delivered on double digit yoy volume growth in 6 out of last 8 quarters. In June 15 quarter Shree volumes grew by 17% yoy; 5% qoq while its opex/tonne remained at almost flat levels despite being in a capex heavy mode. Shree s hit on EBITDA/tonne on yoy basis ( 43%) was driven largely by fall in its net realisations ( 13% yoy). We expect Shree to continue to post robust double digit volume growth over the next few quarters driven by its aggressive capacity additions. Shree has now grown to a size of +23mn tns p.a. in terms of capacity. Shree is bound to gain the maximum with revival of pricing in North India: Shree continues to enjoy relatively much better EBITDA in the industry despite the worst of industry s fundamental sentiments. Notably, realisations of Shree are also lower vs. Peers. In this scenario, it seems obvious that Shree will gain the maximum with revival of cement prices in North India. We believe Shree s EBITDA/tonne has the potential to be +Rs15 levels in medium term and material revival of price realisations at Shree in our opinion will be the next trigger for re rating of its valuation. Size will matter for Shree; further capex announcement seems obvious: We believe Shree will remain concerned of its volume growth and size. Shree will be done with its announced capex by December 215 and this will take Shree s capacity to +25mn tns p.a. Given its strong resource support coupled with phenomenal balance sheet strengths and robust cash flows, in our opinion it is obvious that Shree will announce further capex. This will be more to ensure its growth in size and consistent robust volume growth. In our judgment the next phase of capex at Shree is likely to remain in East India and Shree will continue to grow in size much faster than its industry peers. Rate NEUTRAL with price target of Rs11, ( 6%): We continue to rate Shree as Neutral as we believe the current rich valuations factors most of the current positives. Having said that, we also believe Shree is sitting on verge of a unique opportunity to re rate its valuations further. Shree will be the highest beneficiary of any improvement in price realisations in North India. Valuations here can be scalable upto even US$3/tonne (potential of ~3% upside from current levels) given that Shree remain the most efficient cost producer of cement with a huge capacity base. Notably, we have seen cost efficient cement majors such as Ambuja Cements being traded at ~2.5x replacement cost in the previous cycle and Shree, in our opinion has a similar potential. NEUTRAL CMP RS 11,461 TARGET RS 11, ( 6%) COMPANY DATA O/S SHARES (MN) : 35 MARKET CAP (RSBN) : 399 MARKET CAP (USDBN) : WK HI/LO (RS) : 12399/7125 LIQUIDITY 3M (USDMN) : 6.4 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 64.8 FII / NRI : 11.9 FI / MF : 5.2 NON PROMOTER CORP. HOLDINGS : 11.3 PUBLIC & OTHERS : 6.8 PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS REL TO BSE PRICE VS. SENSEX Apr 13 Apr 14 Apr 15 Shree Cem BSE Sensex Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 9MFY16E FY17E Net Sales 64,399 6,83 88,591 EBIDTA 13,32 14,34 25,234 Net Profit 4,263 5,323 11,146 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: PhillipCapital India Research Est. Vaibhav Agarwal ( ) vagarwal@phillipcapital.in Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Q4FY15 Results (Rs mn) Q4FY15 Q3FY15 QoQ Q4FY14 YoY Cons Vs. Cons Net Sales 17,194 15, % 16, % % Total vol (mn tonnes; Cement + Clinker) % % Cement (mn tonnes) % % Clinker (mn tonnes) %.5 32.% Total Power Revenue 3,984 2, % 3, % External power sales (mn units) % % Average revenue, Rs/unit % % Operating Expenses 13,678 12, % 12, % EBITDA 3,516 3, % 4, % % Margin, % bps bps Cement bps bps Power bps 2867bps Depreciation 2,383 2, % 1, % Other Income % % EBIT 1,578 1, % 2, % Margin, % bps bps Interest paid & others % % Pre tax profit 1,314 1,1 3.% 2,799 Tax provided 33 (226) 114.5% % Tax rate, % 2.5 (22.4) 2491bps.1 241bps Profit after tax 1,281 1, % 2, % % Extraordinaries (24) (4) (2) Adjusted net profit 1,41 1, % 2, % Adjusted EPS, Rs % % Reported EPS, Rs % % Source: Company, PhillipCapital India Research Shree s EBITDA/tonne at Rs 671 despite worst of market conditions in our opinion is the most commendable parameter of its Q4 results. Per Tonne of Cement Sold (Rs) Y/E June, Rs mn Q4FY15 Q3FY15 QoQ Q4FY14 YoY Net Realization 3,487 3, % 4,9 13.% Operating Cost 2,816 2, % 2,842.9% Raw Material % % Stock Adjustment (89) (4) 66 Power and Fuel* % % Employee % 273.4% Selling & Administrative % % Other Expenses % 714.7% EBITDA % 1, % *Adjusted for operating cost for external power sales Source: Company, PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Shree Cement 1yr forward band chart PE band PBV band 25 Rs 18 Rs 7x x 3x 2x 1x x 3x 1x MCap/Sales band EV/EBIDTA band 6 Rs mn 5 4 5x 4x 6 Rs mn x 12x 3 3x 3 8x 2 2x 2 4x 1 1 EV/Sales band EV/ton 6 Rs mn 4 Rs mn 28$ x 4x 3x $ 14$ 2 1 2x $ Source: PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Financials Income Statement Y/E Mar, Rs mn FY14 FY15e 9MFY16e FY17e Net sales 58,759 64,399 6,83 88,591 Growth, % Total income 58,759 64,399 6,83 88,591 Raw material expenses 4,639 5,795 6,74 1,93 Employee expenses 3,953 4,55 5,256 6,316 Other Operating expenses 36,383 4,752 34,467 46,949 EBITDA (Core) 13,784 13,32 14,34 25,234 Growth, % 1.4% 3.5% 7.8% 76.% Margin, % Depreciation 5,499 9,248 7,754 1,777 EBIT 8,285 4,54 6,587 14,457 Growth, % 24.8% 51.1% 62.5% 119.5% Margin, % Interest paid 987 1, Other Non Operating Income 1,41 1,515 1,674 2,496 Pre tax profit 7,894 4,8 7,215 16,75 Tax provided ,892 4,929 Profit after tax 7,879 4,263 5,323 11,146 Net Profit 7,879 4,263 5,323 11,146 Growth, % (21.5) (45.9) Net Profit (adjusted) 7,879 4,263 5,323 11,146 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY14 FY15e 9MFY16e FY17e Cash & bank 1,593 3,75 3,75 1, Debtors 2,966 4,764 4,498 6,554 Inventory 8,98 9,189 8,676 12,64 Loans & advances 6,892 9,66 8,56 12,472 Total current assets 19,548 26,94 24,89 41,666 Gross fixed assets 76,859 91,739 96,739 99,739 Less: Depreciation 47,336 56,584 64,338 75,115 Add: Capital WIP 3, 3, Net fixed assets 29,523 35,154 35,41 27,624 Non current assets 22,788 16,778 16,778 16,778 Total assets 71,859 78,26 76,987 86,67 Current liabilities 8,59 11,558 1,764 15,5 Provisions ,65 2,229 Total current liabilities 8,867 12,528 11,829 17,234 Non current liabilities 15,883 12,735 7,783 2,185 Total liabilities 24,75 25,263 19,611 19,42 Paid up capital Reserves & surplus 46,76 52,415 57,27 66,299 Shareholders equity 47,19 52,763 57,376 66,647 Total equity & liabilities 71,859 78,26 76,987 86,67 Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Mar, Rs mn FY14 FY15e 9MFY16e FY17e Pre tax profit 7,894 4,8 7,215 16,75 Depreciation 5,499 9,248 7,754 1,777 Chg in working capital 3,68 4, ,691 Total tax paid ,892 4,929 Cash flow from operating activities 9,819 17,434 13,567 16,232 Capital expenditure 15,869 14,879 8, 3, Other investing activities 1,62 2, Cash flow from investing activities 14,267 12,518 7,645 2,645 Free cash flow 4,448 4,916 5,922 13,587 Debt raised/(repaid) 3,155 2,625 4,952 5,597 Dividend (incl. tax) ,65 Cash flow from financing activities 2,347 3,433 5,922 6,662 Net chg in cash 2,11 1,483 6,925 Valuation Ratios FY14 FY15e 9MFY16e FY17e Per Share data EPS (INR) Growth, % (6.2) (46.2) (62.5) Book NAV/share (INR) 1, , ,647. 1,913.1 FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) (14.) (21.2) (17.6) (34.) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Economics Midap Dhawal Doshi (9122) Anjali Verma (9122) Amol Rao (9122) Nitesh Sharma, CFA (9122) Infrastructure & IT Services Portfolio Strategy Banking, NBFCs Vibhor Singhal (9122) Anindya Bhowmik (9122) Manish Agarwalla (9122) Deepan Kapadia (9122) Pradeep Agrawal (9122) Technicals Paresh Jain (9122) Logistics, Transportation & Midcap Subodh Gupta, CMT (9122) Vikram Suryavanshi (9122) Consumer, Media, Telecom Production Manager Naveen Kulkarni, CFA, FRM (9122) Metals Ganesh Deorukhkar (9122) Jubil Jain (9122) Dhawal Doshi (9122) Manoj Behera (9122) Yash Doshi (9122) Database Manager Deepak Agarwal (9122) Cement Oil&Gas, Agri Inputs Vaibhav Agarwal (9122) Gauri Anand (9122) Editor Roshan Sony Engineering, Capital Goods Pharma Ankur Sharma (9122) Surya Patra (9122) Sr. Manager Equities Support Hrishikesh Bhagat (9122) Mehul Sheth (9122) Rosie Ferns (9122) Sales & Distribution Corporate Communications Ashvin Patil (9122) Sales Trader Zarine Damania (9122) Shubhangi Agrawal (9122) Dilesh Doshi (9122) Kishor Binwal (9122) Suniil Pandit (9122) Sidharth Agrawal (9122) Execution Bhavin Shah (9122) Mayur Shah (9122) SINGAPORE Phillip Securities Pte Ltd 25 North Bridge Road, #6 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 15 Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 35 The Chicago Board of Trade Building Chicago, IL 664 USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 545 Kuala Lumpur Tel (6) Fax (6) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 122, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance 758 Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 53 Collins Street Melbourne, Victoria 3, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 413 Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 55 Yan An East Road, Ocean Tower Unit 2318 Shanghai 2 1 Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 12 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) Page 5 PHILLIPCAPITAL INDIA RESEARCH

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