Shree Cements (SRCM) is the largest cement manufacturer in North India and among the top cement manufacturing groups in the country. It is a rapidly growing company with focus on its core business of Cement & Power and is recognized as one of the most efficient and environment friendly company in the global cement industry. The company is managed by promoters Mr. B.G. Bangur, Chairman, and Mr. H.M. Bangur, Managing Director, holding 64.79 per cent stake in SRCM. After beginning commercial production in 1985, the company has more than quadrupled its capacity over the past five years to reach the current 29.3 metric tonner per annum (mt p.a.) with manufacturing plants at Beawar, Ras, Khushkhera, Suratgarh, Raipur and Jaipur in Rajasthan and Laksar (Roorkee) in Uttarakhand. SRCM is also engaged in the power sector with power generation capacity of 607MW. Presently, its manufacturing operations are spread over North and Eastern India across six states.
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During the first quarter of 2018 fiscal, profit after tax (PAT) plummeted 13 per cent on year on year basis (YoY) to Rs 440 crore. This was further dragged by higher depreciation, which increased by 50 per cent YoY.
Impressive Volumes and Realisations
For the quarter ended in June 2017, EBITDA for the Kolkata-based cement maker’s stood at Rs 680 crore, surpassing the estimates. The company witnessed remarkable realisations rising by 10 per cent on quarter to quarter basis. This led to 15 per cent increase in net revenue to Rs 2540 crore. The outlook remains positive for realizations given the current firm cement prices in the market.
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The company’s sales volumes have continued to remain strong and impressive with surging at 14 per cent year on year. This is driven by capacity expansions especially its footprint in the East. Going forward as well, the volume trend is expected to remain strong on account of capacity expansion. The growth estimates for fiscal 2018 and 2019 are 14 and 17 per cent, respectively.
Costs and EBITDA break-up
The total costs have mainly been in line with the forecasts. Total cost/t stood at Rs 3,153 rising 11 per cent year on year. The freight cost surged Rs 217 jumped by 26 per cent YoY and has been higher than the estimated cost offset by lower power and fuel cost/t. going ahead, also the costs for freight are expected to remain high.
Cement EBITDA/t stood in line at an impressive Rs 1,157 though down 8 per cent YoY and ahead of the estimate. The total EBITDA stood at Rs 680 crore declined by 7 per cent YoY. The power segment remained weak with facing EBITDA loss of Rs 1.4 crore.
Valuations and Risk
The cement sector’s fundamentals are slowly turning around. However, a bulk of the players continue to suffer from high debt and large‐cap peers are looking to either acquire new assets or return excess cash to parent, leading to believe that utilisation in the industry will inch up slowly.
Going forward, Shree Cement’s superior return on equity (RoE) at 24 per cent plus indicates that current valuations can sustain in the medium term. Moreover, the cash earnings per share growth of the company at 25 per cent plus over 2017-19 is higher than peers’ average; this along with the company reinvesting more than 80 per cent of cash into capacity at cost two-thirds of peers indicates that at least capital cost advantage is likely to sustain over the forecast period, also aiding the valuation.
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Based on the cyclical and capital intensive nature of the cement sector, enterprise to EBITDA ratio (EV/EBITDA) is used for valuation. The stock trades at 17 times expected 2019 EV/EBITDA ratio considering the superior RoE of 24 per cent in 2019 and visibility on sustainable volume growth.
The major risk for the cement-maker is the sharp decrease in cement demand and prices which may lead to earnings downgrade.
