Shree Cement's Q1FY19 results (Outperformer) - Cost inflation impacts margins
Q1FY19 result highlights
- Adj. PAT at Rs2.77bn (-37% yoy): as lower realizations and higher costs offset robust volume growth. During the quarter, Shree also incurred forex loss of Rs700mn (we classify as interest expense).
- Volumes grew by 18.7% yoy to 7mt: led by strong growth in East (ramp up of new plants) as also robust demand in North. Demand continued to be led by infra and housing. Normalization of sand availability in Bihar supported demand in the region.
- Realizations at Rs4107/t (-2.3% yoy, -Rs50/t qoq): on weak prices in North as well as East on yoy basis. The qoq decline was largely due to weak prices in North while prices in East were relatively stable. We note that cement prices improved in North in Jun-18, which will have a positive impact on 2Q19 margins.
- EBITDA/t at Rs863 (-28.9% yoy, -Rs92/t qoq): Costs increased by 8.4% yoy led by continued input cost pressures on petcoke and diesel reflected in higher P&F costs (+28.6% yoy) and freight costs (+14.2% yoy), which offset benefits of positive operating leverage. On a qoq basis, costs/t +1.3% led by higher freight, P&F costs as also higher fixed charges (employee and other exp). Hence, cement EBITDA declined 15.6% yoy to Rs6.03bn.
- Merchant power EBITDA at Rs420mn (vs Rs14mn loss in 1Q18): due to higher volumes (+58%yoy to 450mn units) and realizations (+33% yoy to Rs4.5/unit). Hence, overall EBITDA declined 9.5% yoy to Rs6.5bn.
- 3mtpa GU commissioned at Gulbarga: in end-June. The clinker unit will be opnl by end-3Q19 that will increase its capacity to 37.9mtpa.
Key positives: Sustained volume growth
Key negatives: Higher costs
Impact on financials: FY19/FY20 EPS cut by 7% each to Rs373/467.
Valuation and view
Efficient capital allocation (lower capex on per ton basis relative to industry), cost efficiencies and capacity additions (~42mtpa by FY20; 46mtpa consol vs 35mtpa at FY18 end) is likely to drive sustained growth for SRCL (18% EBITDA CAGR over FY18-20E), however earnings CAGR slower at 10% on accelerated depreciation. SRCL trades at 15.5x EV/EBITDA and US$181/t (FY20E consol). We expect premium valuations to sustain given superior return ratios, 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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