Shree Cement February 03, 2015 Shree Cement (SRCM) reported Q2FY15 EBITDA tad above our expectation on the back of better than expected earnings in Power business. We maintain our positive outlook on SRCM given its highly efficient operations, quality management and strong growth potential. However, the potential upside is limited due to sharp run‐
up in the stock and rich valuations. At CMP, stock is trading at EV/EBITDA of 17x/13x FY16E/FY17E. On EV/T, it is quoting at US$215 FY17E capacity of 25m tonnes. Given the low return potential and expensive valuations, we downgrade the stock from BUY to Accumulate with PT of Rs12200, EV/EBITDA of 15x FY17E. Kamlesh Bagmar [email protected] +91‐22‐66322237 Ankit Shah [email protected] +91‐22‐66322244 Rating Price Target Price Implied Upside Sensex Nifty Accumulate Rs10,848 Rs12,200 12.5% 29,000 8,757 (Prices as on February 03, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders Promoters Foreign Domestic Inst. Public & Other Stock Performance (%) 1M 6M Absolute 16.3 47.4 Relative 12.3 33.6 How we differ from Consensus EPS (Rs) PL Cons. 2016 271.6 458.3 2017 549.8 615.0 
EBITDA/t flat YoY at Rs715; volumes drive the growth in EBITDA: SRCM sold 3.8m t (PLe: 3.8mt) of volumes, with realisations ahead of our estimates at Rs3,540 (PLe: Rs3,502)/t, up 3% YoY/Rs109. However, higher realisations were entirely undone by higher than expected fuel cost. Total cost/t rose 4% YoY/Rs110 at Rs2825 (PLe: Rs2794). Thanks to 11% volume growth and flat EBITDA/T, EBITDA grew 11% YoY at Rs2.73bn (PLe: Rs2.71bn) 
Power biz EBITDA beats expectation: Power biz’s volumes rose 20% YoY at 491m (PLe: 490m) units. Realisations rose 16% at Rs3.9/unit, ahead of our expectation of Rs3.6. Cost/unit increased 18%/Rs0.49 at Rs3.26, above our expectation of Rs3.19 on account of higher pet coke cost. Thanks to strong growth in volumes and improved margins (up 11% at Rs0.63/unit), EBITDA rose 33% YoY at Rs310 (PLe:Rs221m). 
Valuation and Outlook: We expect SRCM’s EBITDA to grow at CAGR of ~25% in FY15‐FY17 on the back of strong volume growth and positive outlook on prices. Sizeable capacity base (25m tonnes by H2CY16 from current 17.5m tonnes), quality operations and robust cash flow generation would sustain the premium valuations for the stock. However, the upside potential in the stock price would be limited from current levels due to rich valuations. 377.9 34.8 247.4 64.79% 10.85% 6.03% 18.33% 12M 147.0 103.5 % Diff. ‐40.7 ‐10.6 Price Performance (RIC:SHCM.BO, BB:SRCM IN) Key financials (Y/e June) Revenues (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs) 2014
58,759
5.5
13,674
7,718
221.5
(23.2)
22.0
2015E 69,105 17.6 15,244 5,888 169.0 (23.7) 25.0 2016E
86,943
25.8
21,246
9,464
271.6
60.7
28.0
2017E
102,551
18.0
26,438
19,155
549.8
102.4
28.0
2014
23.3
18.0
13.9
26.8
314.2
49.0
8.0
0.2
2015E 22.1 11.7 9.8 24.2 309.4 64.2 7.1 0.2 2016E
24.4
16.2
13.5
17.0
245.9
39.9
6.0
0.3
2017E
25.8
26.1
23.0
13.0
215.2
19.7
4.5
0.3
(Rs)
12,000
10,000
8,000
6,000
4,000
2,000
Feb‐15
Dec‐14
Oct‐14
Aug‐14
Jun‐14
Apr‐14
Feb‐14
0
Source: Bloomberg Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / EBITDA (x) EV / Tonne ($) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Q2FY15 Result Update Strong business outlook; but low on upside potential
Exhibit 1:
Shree Cement Q2FY15 Result Overview (Rs m) Y/e June Q2FY15 Q2FY14
YoY gr. (%)
Q1FY15
H1FY15 H1FY14
YoY gr. (%)
Net Sales 15,419 13,170
17.1
16,053
31,471 25,645
(18.5)
1,241 910
36.4
1,308
2,549 1,907
33.7
8.0 6.9
8.1
8.1 7.4
1,095 1,011
8.3
1,128
2,222 2,024
7.0
7.1 7.9
26.6
4,135
8,089 6,127
25.8
25.7 23.9
3,170
6,427 5,303
19.7
20.4 20.7
8.2
2,937
5,775 5,097
Raw Material % of Net Sales Staff Costs % of Net Sales Power & Fuel % of Net Sales Freight and selling expenses % of Net Sales Other Expenses 7.1 7.7
3,954 3,123
25.6 23.7
3,257 2,809
21.1 21.3
2,838 2,623
15.9
9.8
32.0
21.2
13.3
% of Net Sales 18.4 19.9
18.3
18.3 19.9
Total Expenditure 12,384 10,476
18.2
12,677
25,061 20,457
22.5
3,035 2,694
12.7
3,376
6,411 5,188
23.6
21.0
20.4 20.2
73.9
2,227
4,236 2,294
EBITDA Margin (%) Depreciation Other income 19.7 20.5
2,009 1,156
84.6
227 111
105.8
309
536 850
(36.9)
1,253 1,649
(24.0)
1,458
2,711 3,744
(27.6)
Interest 323 309
4.3
350
672 621
8.2
PBT 930 1,339
(30.6)
1,109
2,039 3,122
(34.7)
(8) (32)
(67)
(75) (42)
78.2
922 1,308
(29.5)
1,041
1,963 3,080
(36.3)
(109.6)
(130.3)
EBIT Extraordinary income/(expense) PBT (After EO) Tax (15) 153
% PBT (1.6) 11.7
(47)
(62) 203
(4.5)
(3.1) 6.6
Reported PAT 937 1,155
(18.9)
1,088
2,025 2,877
(29.6)
Adjusted PAT 778 1,187
(34.4)
1,155
1,934 2,919
(33.8)
Q2FY15 Q2FY14
YoY gr. (%)
Q1FY15
H1FY15 H1FY14
YoY gr. (%)
Source: Company Data, PL Research Exhibit 2:
Operating Metrics Y/e June Volume (m te)‐Cement 3.8 3.4
10.9
3.9
7.7 6.7
14.8
Volume (m units)‐Power 491 409
20.3
488
979 826
18.6
3,540 3,430
3.2
3,648
3,594 3,383
6.2
Net Realisations (Rs/te) Realised rate (Rs/unit) 3.89 3.34
16.5
3.89
3.89 3.54
9.9
Cement EBITDA (Rs m) 2,725 2,461
10.7
3,166
5,891 4,646
26.8
310 233
32.9
210
519 541
(4.1)
Power EBITDA (Rs m) Cement EBITDA/ te (Rs/te) 715 716
(0.1)
817
766 694
10.5
Power EBITDA/Kwh (Rs) 0.63 0.57
10.5
0.43
0.53 0.66
(19.1)
Source: Company Data, PL Research February 03, 2015 2
Income Statement (Rs m) Y/e June 2014 2015E 2016E
2017E
Net Revenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Ex‐Od items / Min. Int. Adj. PAT Avg. Shares O/S (m) EPS (Rs.) 69,105 9,356 59,749 4,546 39,959 15,244 8,744 1,564 2,073 7,010 1,122 5,888 — 5,888 34.8 169.0 86,943
11,609
75,335
5,228
48,860
21,246
11,213
1,549
2,782
11,266
1,803
9,464
—
9,464
34.8
271.6
102,551
13,607
88,944
6,012
56,494
26,438
6,158
1,065
3,589
22,803
3,649
19,155
—
19,155
34.8
549.8
58,759 7,565 51,194 3,953 33,567 13,674 5,499 1,022 999 8,152 279 7,872 (805) 7,718 34.8 221.5 Shree Cement Balance Sheet Abstract (Rs m) Y/e June 2014 2015E 2016E
2017E
Shareholder's Funds Total Debt Other Liabilities Total Liabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash & Equivalents Other Current Assets Current Liabilities Other Assets Total Assets 47,109 11,999 6,529 65,636 32,947 — — 31,261 24,037 14,875 7,651 1,429 65,636 53,578 14,999 6,748 75,325 42,888 — — 30,658 24,201 14,925 8,468 1,779 75,325 63,501
9,999
6,968
80,467
42,075
—
—
36,050
27,823
18,097
9,870
2,342
80,467
83,114
1,999
7,188
92,301
42,817
—
—
46,001
37,009
19,964
10,972
3,483
92,301
Quarterly Financials (Rs m) Y/e June Q3FY14 Cash Flow Abstract (Rs m) Y/e June C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE 2014 2015E 2016E
2017E
14,004 (12,079) (1,555) 371 4,674 4,784 3,001 2,118 14,095 (16,612) 2,681 164 4,784 4,949 (6,366) (3,366) 17,223
(7,618)
(5,983)
3,622
4,949
8,571
13,407
8,407
21,587
(3,311)
(9,091)
9,186
8,571
17,757
9,547
1,547
Key Financial Metrics Y/e June Growth 2014 2015E 2016E
Revenue (%) EBITDA (%) PAT (%) EPS (%) 5.5 (8.9) (23.2) (23.2) 17.6 11.5 (23.7) (23.7) 25.8
39.4
60.7
60.7
18.0
24.4
102.4
102.4
24.4
10.9
13.5
16.2
25.8
18.7
23.0
26.1
(0.3)
15
(0.4)
19
39.9
6.0
17.0
4.1
19.7
4.5
13.0
3.3
16.0
24.7
11.7
88.8
16.0
15.7
5.5
8.1
EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Q1FY15
Q2FY15
16,514 4,335 26.2 1,538 308 568 3,037 267 2,770 2,515 16,053
3,376
21.0
2,227
350
309
1,041
(47)
1,088
1,155
15,419
3,035
19.7
2,009
323
227
922
(15)
937
945
2014 2015E 2016E
2017E
Volume (mn te)‐Cement 14.3 Volume (mn units)‐Power 1,859.7 Net Realisations (Rs/te) 3,671.7 Realised rate (Rs/unit) 3.5 Cement EBITDA (Rs/te) 920.8 Raw material cost (Rs/te) 0.4 Power & Fuel cost (Rs/te) 556.6 Freight cost (Rs/te) 607.5 Source: Company Data, PL Research. 16.5 1,824.9 3,781.9 3.7 864.0 331.8 632.0 637.9 19.7
2,094.9
4,008.8
3.8
1,023.9
351.1
643.5
657.0
22.1
2,204.9
4,249.4
3.9
1,148.0
363.1
675.8
676.7
Profitability Q4FY14 16,600 4,261 25.7 1,667 363 546 2,034 (191) 2,225 2,284 Net Revenue EBITDA % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Adj. PAT 23.3 13.1 13.9 18.0 22.1 8.5 9.8 11.7 (0.3) 97 (0.2) 2 49.0 8.0 26.8 6.2 64.2 7.1 24.2 5.3 Eff. Tax Rate 3.4 Other Inc / PBT 20.1 Eff. Depr. Rate (%) 8.0 FCFE / PAT 27.4 Source: Company Data, PL Research. 16.0 29.6 9.7 (57.2) 2017E
Key Operating Metrics Y/e June February 03, 2015 3
Shree Cement Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage
50%
42.4%
40%
PL’s Recommendation Nomenclature 38.8%
30%
17.6%
20%
10%
1.2%
0%
BUY
Accumulate
Reduce
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month Not Rated (NR) : No specific call on the stock Under Review (UR) : Sell
Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Kamlesh Bagmar (CA, CFA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co‐managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Kamlesh Bagmar (CA, CFA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. February 03, 2015 4