Shree Cement's Q2FY20 results (Neutral) - Strong realizations
Q2FY20 result highlights
- Adj. PAT at Rs3.09bn (+88.6% yoy): led by higher than expected realisation growth.
- Volumes growth muted at 1.5% yoy to 5.72mt: due to weak demand across regions particularly in East (30% of volumes) led by heavy monsoons and floods.
- Realizations jump 9% yoy: to Rs4653/t (-Rs50/t qoq) as the sharp price hikes in 1QFY20 largely sustained in North (70% of volumes), while East saw sharp price corrections on weak demand.
- Costs fell by 2.1% yoy to Rs3201/t: led by 2.5% yoy decline in freight cost (lower diesel prices higher axle load benefits), 19% yoy decline in P&F cost (+Rs20/t qoq) on lower petcoke prices, 10% yoy decline in RM costs and 1.5% yoy decline in other expenses (lower packaging costs). This was partially offset by 7.2% increase in employee cost due to negative operating leverage. Cement EBITDA/t at Rs1452 (+45% yoy; +Rs8 qoq), EBITDA at Rs8.31bn (+47.3% yoy).
- Merchant power EBITDA drops 66% yoy to Rs136mn: due to lower volumes (-8.5% yoy to 366m units) and realizations (-15% yoy to Rs3.8/unit). Overall EBITDA grew 39.8% yoy to Rs8.44bn.
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 in 3QFY20. 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 sharp price hikes in 1HFY20. 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 upgraded by 1% each to Rs470/651.
Valuation and view
Shree has doubled its domestic capacity over the past 5 years to 37.9mtpa at efficient capex (lower capex per ton relative to industry). We expect ramp up in utilisations and sustained adds (46.4mtpa by FY21) to drive an uptick in earnings growth (25% /41% EBITDA/earnings CAGR over FY19-21E). Shree has taken a board resolution for equity raise of upto Rs30bn (4.6% dilution) with likely utilisation towards acquisitions, which is a departure from its earlier strategy. Shree trades at 14x EV/EBITDA and US$188 on EV/t (FY21E), a premium to other peers, driven by its superior return ratios and free cash flow generation – any risk to these factors could drive a de-rating. 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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