Shree Cement's Q3FY19 results (Outperformer) - Cost efficiencies drive operational growth
Q3FY19 result highlights
- Adj. PAT at Rs3.01bn (+2.8% yoy): as higher depreciation, interest rate and tax rate offset strong operating performance.
- Volumes +11.4% yoy to 5.93mt: led by sustained strong growth in East led by infra and housing. North region (70% of vols) continued to see demand momentum, however growth was muted on sand mining ban and elections in Rajasthan.
- Realizations at Rs4315/t (+4.4% yoy, +Rs47/t qoq): led by higher prices in the North & Central and shift towards trade in North. Shree will focus on trade segment in the south mkt and scale up utilisations at a gradual pace.
- EBITDA at Rs1066/t (+6% yoy, +Rs67/t qoq): Cement cost/t +3.9% yoy to Rs3248 on higher P&F costs (+12% yoy, -Rs7/t qoq; the decline in petcoke prices would be largely visible from 4Q19 onwards). However, this was slightly offset by 1.7% yoy drop (+Rs58/t qoq) in freight on higher rail movement and axle load benefits. Hence, cement EBITDA +18.2% yoy to Rs6.3bn.
- Merchant power EBITDA at Rs576mn (vs Rs57mn loss in 3Q18): due to higher volumes (+63% yoy to 446mn units) and realizations (+32% yoy to Rs5/unit). Overall EBITDA +30% yoy to Rs6.9bn. We have treated Rs200mn forex gain on ECB debt as other income.
- Expansion of 5.5mtpa GU in East on track: to be commissioned by 3QFY20 (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. During the quarter, Shree has commissioned 3mtpa clinker plant for its Karnataka facility (GU commissioned earlier).
Impact on financials: 3% cut in FY19 EPS to Rs316; FY20 EPS at Rs441 (no chg)
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 (17% EBITDA CAGR over FY18-20E), however earnings CAGR slower at 6% on accelerated depreciation. SRCL trades at 15.3x EV/EBITDA and US$171/t (FY20E consol). We expect premium valuations to sustain given superior return ratios, continued free cash flow generation and capacity expansions (driving mkt share gains and volume growth). 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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