Shree Cement's Q3FY20 results (Neutral) - Cost efficiencies aid profitability
Q3FY20 result highlights
- Adj. PAT at Rs3.05bn (+1.1% yoy): led by higher realisations and cost efficiencies. This was partly offset by higher tax rate (3Q20 at 25.3% vs 3Q19 at 18.6%)
- Volume growth at 5.3% yoy to 6.25mt: driven by demand pick up in East (pick up seen in Dec-19) as also in North. Shree has limited presence in South (5-7% of volumes).
- Realizations increased 4.6% yoy: to Rs4512/t (-Rs141 or -3% qoq) as the sharp price hikes in 1QFY20 were gradually rolled back in East (~30% of volumes) on weak demand, while North region saw marginal price cuts on stable demand. Our channel checks suggest Rs10-15/bag hikes in both North and East regions.
- Cost efficiencies led to 3% yoy decline in costs: to Rs3147/t. Power & fuel costs fell by 15% yoy to Rs713/t (-Rs112/t qoq) led by lower petcoke prices, while freight costs too declined by 6% yoy. However, on yoy basis, employee costs (+5.7% yoy) and other costs (+2.2% yoy) restricted cost savings. Hence, cement EBITDA/t at Rs1365 (+28% yoy; -Rs87/t qoq), EBITDA at Rs8.5bn (+35% yoy).
- Merchant power EBITDA loss of Rs30mn: vs Rs576mn profit in 3QFY19 due on 85% yoy drop in volumes and 9% yoy drop in realisations. Overall EBITDA grew 23% yoy to Rs8.5bn.
Capacity expansion on track: 2.5mt GU at Jharkhand commissioned in 1QFY20; 3mt GU at Odisha is expected to be commissioned in 4Q20. Further, 2mpta GU in Pune, Maharashtra to be commissioned in FY21. This will result in 50.4mtpa capacity (domestic) by FY21E.
Impact on financials: No change to our FY20/21E EPS of Rs413/572.
Valuation and view
Overall, operating performance has been strong led by positive surprise in costs (power & fuel savings). Moreover, presence in North has enabled realisations to remain sticky despite volume growth from East (weak cement prices) resulting in strong cement EBITDA/t (+28% yoy). Shree has more than doubled its domestic capacity over the past 5 years and continues to add capacity (50.4mtpa by FY21E) at an efficient capex (lower capex per ton relative to industry). We expect ramp up in utilisations to drive an uptick in earnings growth (25% /37% EBITDA/earnings CAGR over FY19-21E). However, rich valuations of 19x FY21E EV/EBITDA and US$249 on EV/t is likely to keep stock performance in check. 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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