Shree Cement's Q2FY19 results (Outperformer) - Strong operational performance
Q2FY19 result highlights
- Adj. PAT at Rs1.64bn (-26% yoy): as higher costs offset robust volume growth. During the quarter, Shree wrote off Rs1.78bn on investment in IL&FS leading to reported PAT of Rs494mn. Shree also incurred Rs840mn MTM forex loss (we classify as interest expense).
- Volumes + 15.6% yoy to 5.64mt: led by strong 45% yoy growth in East (ramp up of new plants; 80% utilisation) as also 10% yoy in North (70% of vols). Demand continued to be led by infra and housing.
- Realizations at Rs4268/t (+2.4% yoy,+Rs161/t qoq): led by higher prices in the North, shift towards trade in North (70% trade in 2Q19 vs 60% trade in 2Q18). East mkt is largely led by trade demand. Shree will focus on trade segment in the south mkt and scale up utilisations at a gradual pace.
- EBITDA at Rs1000/t (-12% yoy, +Rs136/t qoq): Cement cost/t +8% yoy to Rs3268 on higher P&F costs (+30% yoy, +Rs55/t qoq, higher fuel prices, albeit now peaking and 3Q19 seeing decline in prices). However, this was offset by 5% yoy drop (-Rs180/t qoq) in freight on Rs304mn railway freight rebates, axle load benefit, higher ex-factory sales and lean season benefits. Hence, cement EBITDA +2% yoy to Rs5.6bn. The gap between East & North EBITDA is marginal at Rs50/t.
- Merchant power EBITDA at Rs400mn (vs Rs78mn in 2Q18): due to higher volumes (+36%yoy to 400mn units) and realizations (+29% yoy to Rs4.5/unit). Hence, overall EBITDA +8% yoy to Rs6.04bn.
- Expansion of 5.5mtpa GU in East: to be commissioned by 3Q20 (Odisha: 3mt & Jharkhand: 2.5mt) at Rs9bn. Shree’s cement capacity will increase from 38mtpa to 43.4mtpa by FY20E (23.4mtpa clinker), while 2mpta GU in Pune will take total capacity to 45mtpa in FY21.
Impact on financials: FY19 EPS cut by 7.5% to Rs345 (MTM forex loss).
Valuation and view
Efficient capital allocation (lower capex on per ton basis relative to industry), cost efficiencies and capacity additions (~43mtpa by FY20 vs 35mtpa at FY18 end) is likely to drive sustained growth for Shree (19% 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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