MOSL: SHREE CEMENT (Buy)-EBITDA beat led by better realization and lower other expenses

​Shree Cement: EBITDA beat led by better realization and lower other expenses

(SRCM IN, Mkt Cap USD9.7b, CMP INR18629, TP INR21852, 22% Upside, Buy)

• Healthy volume growth in north: 2QFY18 volume including clinker rose ~7% YoY (-17% QoQ) to 4.88mt, led by healthy growth in north. Pure cement volume rose 11% YoY. However, volume growth was somewhat impacted by the ongoing sand mining ban in Bihar. Realization increased ~3% YoY (-1% QoQ), higher than our estimate, due to a higher proportion of cement sales to clinker. Power units fell 45% YoY to 295m on weak merchant power rates. Revenue rose 4% YoY to INR21.36b (est. of INR20.72b). Cement revenue was INR20.34b (+10% YoY), with EBITDA of INR5.52b (-14% YoY) exceeding our estimate due to the incorporation of incentives received as part of revenues (prior-period EBITDA is restated). Power revenue fell 47% YoY to INR1,025m, with EBITDA at INR78m (in-line) due to weak merchant power rates.
  
• Healthy realization and lower other expenses drive margin: EBITDA of INR5.6b (-20% YoY) exceeded our estimate of INR4.41b due to higher realization and lower other expenses. Overall margin contracted 7.9pp YoY (-1.50pp QoQ) to 26.2% due to an increase in YoY unitary costing led by higher freight and P&F cost, and lower power EBITDA. Tax rate was higher at 47% for 2Q due to the exclusion from MAT rate entitlement for SRCM. Hence, PAT fell 27% YoY to INR2.12b (est. of INR2.79b).
  
• Capex, capacity addition plans: SRCM is likely to incur INR20b of capex in FY18, as it is likely to add capacity of 1) 3.6mt of GU in Rajasthan, 2) 2mt of GU in Bihar, 3) 0.9mt of GU in Bihar and 4) 2.8mt of clinker unit in Chhattisgarh by March 2018. It is also likely to add 3mt of integrated unit in Karnataka by 1HFY19.