Shree Cement's Q3FY18 results (Outperformer) - Volume growth sustains, capacity add on track
Q3FY18 result highlights
- Adj. PAT at Rs2.93bn (+23% yoy): led by higher volumes, higher power EBITDA as also lower depreciation.
- Volumes grew by 8.4% yoy to 5.33mt: led by strong growth in East (low base). Sand availability improved in Bihar towards the end of the quarter, while demand picked up in North on back of IHB led demand.
- Realizations at Rs4120/t (-3% yoy, -Rs50/t qoq): led by lower prices in North on yoy basis led by weak pricing discipline amongst players.
- Higher costs restrict EBITDA/t at Rs1005 (-1% yoy, -Rs128/t qoq): Costs increased by 14% yoy largely due to higher P&F costs (+40% yoy, higher petcoke prices) and freight costs (+30% yoy, higher diesel prices, clampdown on overloading), which was offset against lower other exp. On a qoq basis, costs/t +2.6% led by higher P&F costs. However, higher cement volumes led to 7% yoy increase in cement EBITDA to Rs5.35bn.
- Merchant power EBITDA loss declines to Rs57mn: due to higher volumes (+247% yoy, low base). Albeit, segment loss on higher petcoke prices. Consequently, overall EBITDA +8% yoy to Rs5.3bn.
- Forays in intl mkts via acquisition: of 92.83% stake in Union Cement Company (UCC), UAE, for a 4mtpa (3.3mtpa clinker) plant at US$303mn EV (17% premium to current mkt cap). In CY16, UCC had US$153mn revenues and US$34mn EBITDA, implying valuation of US$76 on EV/t and 9x CY16 EV/EBITDA, which appears reasonable. With this acquisition, capacity would increase to 33.3mtpa (2.6mtpa plant commissioned in Chhattisgarh in Dec-17, on track for ~40mtpa by FY20).
Key positives: Sustained volume growth
Key negatives: Continued weakness in power biz
Impact on financials: FY18/FY19/FY20 EPS maintained at Rs383/487/591.
Valuation and view
Efficient capital allocation (sharply lower capex on per ton basis relative to industry), cost efficiencies and capacity additions (likely to reach 40mtpa by FY20 from 27.2mtpa at FY17 end) is likely to drive sustained growth for SRCL (24% earnings CAGR over FY18-20E). SRCL trades at 19.4x/15.7x FY19E/FY20E EV/EBITDA and US$238/t (FY19E). We expect premium valuations to sustain given superior return ratios (20%+), strong earnings growth momentum, continued free cash flow generation and capacity expansions (driving mkt share gains). Outperformer.
Shree Cements is engaged in the manufacture of cement. Co.'s brands include Shree Ultra, Bangur Cement, and Rockstrong Cement. Shree Ultra is Co.'s flagship brand. This brand has two variants, Shree Ultra OPC and Shree Ultra Jung Rodhak Cement. Shree Ultra Jung Rodhak Cement has unique rust prevention properties. Bangur Cement, launched as a premium brand in the market, is designed to meet the high end market segment. Rockstrong Cement is the youngest brand. This brand has high performance and ability to withstand exceptionally harsh environment conditions.
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