Shree Cement's Q1FY20 results (Downgrade to Neutral) - Higher realizations drive profits; priced in
Q1FY20 result highlights
- Adj. PAT at Rs3.63bn (+31% yoy): led by strong realisation growth partially offset by higher tax rate.
- Volumes see sharp decline of 13% yoy to 6.06mt: due to weak demand particularly in East led by heavy monsoons and floods in Bihar. Concurrently, focus on trade sales further impacted volumes.
- Realizations jump led by price hikes: to Rs4701/t (+14.5% yoy, +Rs478/t qoq) led by strong price hikes in North and shift towards trade segment.
- Negative operating leverage impacts cost: as seen in employee costs (+29% yoy) and other expenses (+12% yoy). Further, P&F costs increased by 2.4% yoy on higher petcoke prices, albeit fell Rs24 qoq as petcoke costs are trending downwards. Freight cost fell 10% yoy to Rs1103/t on benefit of higher axle load & lower diesel prices. Hence, overall cost/t were up by 0.5% yoy to Rs3260). Cement EBITDA/t at Rs1443 (67% yoy; Rs340 qoq), EBITDA at Rs8.74bn (+45% yoy).
- Merchant power EBITDA drops 33% yoy to Rs280mn: due to lower volumes (16% yoy to 380m units) partially offset by higher realizations (+11% yoy to Rs4.9/unit). Overall EBITDA grew 40% yoy to Rs9bn.
Capacity expansion on track: 5.5mt GU in East: 2.5mt GU at Jharkhand was commissioned in 1QFY20; 3mt GU at Odisha is expected to be commissioned by Sept-19. Further, 2mpta GU in Pune in FY21 (Dec-20). Hence, domestic capacity will be 46.4mtpa by end of FY21.
Focus on pricing vs volumes: Shree has seen Rs30-35/bag price hikes in Apr-19. Mgmt highlighted that it would be focusing on enhancing realisations led by price hikes and focus on trade and premium products.
Impact on financials: FY20/21E EPS cut by 9%/4% to Rs464/644 due to higher tax and lower volumes.
Valuation and view
Shree has doubled its capacity over the past 5 years to 37.9mtpa (domestic) at efficient capex (lower capex per ton relative to industry). We expect ramp up in utilisations as also sustained capacity adds (46.4mtpa by FY21) to drive an uptick in earnings growth (24% /40% EBITDA and earnings CAGR over FY19-21E). However, the market share loss in 1QFY20 and rich valuations of 15.5x EV/EBITDA and US$206/t (FY21E) are factoring in the positives of superior return ratios and free cash flow generation. Downgrade to Neutral.
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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